Swiss franc likely to become Brexit's collateral damage
- The SNB said Brexit may cause uncertainty and turbulence to increase
- But the fallout could match that of when the EURCHF peg was abandoned
- The Swiss franc may become collateral damage following Brexit
- A cut to the deposit rate, perhaps to minus 1.00%, is needed sooner rather than later
By Max McKegg
Ahead of next week’s Brexit vote, safe-haven flows are moving into the Swiss franc, adding to upward pressure caused by declining bond yields worldwide and a US Federal Reserve retreating to the sidelines. Yesterday’s quarterly monetary policy assessment from the Swiss National Bank acknowledged the risks around the situation, especially as the exchange rate is already “significantly overvalued” and needs to decline if the Bank is to have any hope of meeting its 2% inflation objective.
putting upward pressure on it. Photo: iStock
As shown in the chart below, the SNB’s inflation forecast for the next year has risen compared with that given in its March policy statement “principally due to the increase in oil prices in the intervening period”. However, according to the Bank’s model, this effect “vanishes” mid next year and the inflation track for 2018-19 reverts to its previously estimated path. The Bank says the medium-term outlook is consistent with inflation expectations surveys.
The three-year ahead forecasts assume Swiss Libor remains at minus 0.75% during the entire period.
Consistent with previous statements, President Thomas Jordan emphasised that the SNB’s monetary policy is based on two key elements: negative interest rates ( “an absolutely essential instrument at this point in time”) and a willingness to intervene in the foreign exchange market.
This situation is unlikely to change in the foreseeable future: the target range for 3 month Libor is being maintained at minus 0.25% to minus 1.25%. As of now it’s sitting right in the middle.
On the currency front, the SNB will be chagrined that Brexit-induced safe-haven flows are threatening to undo the positive developments since the 1.20 EURCHF peg was abandoned in January 2015.
What can the SNB do about it ? Firstly, it can keep its fingers crossed the Brits won’t score a massive own goal by voting “Leave” next week. But even if sense prevails, developments in other financial markets will keep upward pressure on Switzerland’s exchange rate.
The alternative is to up the ante on FX intervention. But, as this chart shows, sales of CHF in exchange for foreign currencies are already on a steep trajectory; indeed to such an extent that the SNB's balance sheet is now almost the same size as the entire Swiss economy.
The SNB’s monetary policy assessment said Brexit “may cause uncertainty and turbulence to increase” in already fragile financial markets. That may be an understatement: the fallout could, in fact, match that of January 2015 when the EURCHF peg was abandoned.