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Article 173
SFDRThe Swiss National Bank (SNB) surprised the markets yesterday when it announced the end of its currency floor, which had seen the Swiss Franc pegged to the EUR/USD at 1.2. The reason? The SNB claimed that the overvaluation of its currency had decreased since the introduction of this floor in 2011. And even more versus the USD (against which the EUR has depreciated in recent months). The SNB, however, hasn’t ruled out further intervention on the currency markets to protect the CHF. At the same time, its key interest rate has been cut to -0.75% from -0.25%.
The immediate result was a strong appreciation of the CHF against the other currencies that equalled, and even exceeded, previous highs (versus EUR & USD). We see this as a technical manoeuvre, with massive buybacks of investors’ short positions, the latter under the impression that the SNB was going to defend its currency at all costs against excessive overvaluation.
On the bond market, the SNB’s surprise decision saw the sovereign rate curve fall even further, its negative status encompassing all yields up to the 10Y.
In macro terms, the situation in Switzerland is expected to worsen: inflation is in negative figures and growth is weak (2015 forecasts pre-dating the SNB decision: c. 1-1.5%). Any pronounced and sustainable appreciation of the currency will strongly penalise exporters and increase deflationary pressures even further; this, in turn, will end up seriously impacting growth.
Our Fair Value models indicate that the Swiss currency was highly overvalued against the EUR prior to this week. This is even more so the case now.
In the short term, upward pressure on the CHF could last following the major unwinding of short positions. Nonetheless, in the medium-to-long term, the CHF could forfeit its status of safe-haven currency as there are few, if any, supporting factors: overvaluation (e.g., in terms of purchasing power parity), very expensive bonds (negative yields), highly penalised exporters, falling inflation and growth, and the SNB’s determination to protect its currency by any other means.
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