SNB Ramps Up Action to Tackle Franc Gains; EUR/CHF Spikes
THE TAKEAWAY: SNB initiates new liquidity policies > SNB tries to weaken franc > EURCHF spikes
After unexpectedly adopting a near zero interest rate last week the SNB has once again taken unprecedented action this morning to try and curtail franc gains and weaken their currency. The Swiss National Bank says that it is expanding measures against the strong franc by “significantly increasing supply of liquidity to the market”. The SNB commented that they see a “substantial rise in risk aversion on markets” which is likely the cause for the short-lived success of their actions last week as players continue to search for safety amid turbulent times. The SNB aims to rapidly expand banks’ sight deposits (meaning funds that can be transferred without restriction or can be converted into cash) at the SNB from Chf80 billion to Chf120 billion, the SNB will also conduct foreign exchange swap transactions to accelerate the increase of liquidity.
The Swiss franc has always been recognized as a safe haven asset and in the aftermath of the S&P downgrade of the US on Friday and subsequent whipsaw moves in currency, equity and commodity markets many players are either making for the sidelines or for the safety of assets like the Swiss franc. However, the SNB is wary of franc strength wreaking havoc on the Swiss economy primarily though deflation and therefore is taking action to try weaken the currency. The SNB is yet to directly intervene in currency markets in its latest efforts to tackle franc strength after losing billions of francs only months ago as it tried to contain franc strength. The central bank has therefore, thus far, used policy tools to try weaken the currency from “massive overvaluation” and reduce the threat it poses to the “development of the economy”.
The Swiss franc weakened immediately against most of its major trading partners in the aftermath of the SNB announcement. The spike higher in Eur/Chf was short-lived as the market remains relatively unimpressed with SNB efforts thus far and remains comfortable taking on the SNB as it continues to shy away from direct action in the market. For a technical outlook of franc pairs and crosses.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.