Strong Swiss Franc Might Become Tougher Challenge for SNB

One-month implied volatility in the Euro/Franc Forex pair climbed to its highest level in nearly two months on Wednesday, up by as much as 11 basis points to 4.27%, according to Bloomberg. 
James Hyerczyk

The Swiss Franc strengthened beyond 1.075 per Euro for the first time since April 2017 on Wednesday after the U.S. Treasury put the nation back on its currency watch list and urged the country to adjust its macroeconomic policies.

In its report, the Treasury called on Switzerland to “more forcefully support domestic economic activity.” It said the country has been under using fiscal policy to spur growth. Switzerland has interest rates of minus 0.75%.

“As monetary policy approaches its limits, Treasury urges Switzerland to use its ample fiscal space…to cut taxes and pursue structural reforms to spur investment,” the report said.

On Thursday at 05:22 GMT, the EUR/CHF is trading 1.0755, up 0.0007 or +0.06%.

Monthly EUR/CHF

Swiss National Bank Responds

Some say Washington’s complaints over Switzerland’s currency policy may actually make it harder for the Swiss National Bank (SNB) to stay out of the foreign-exchange market. According to Bloomberg, strategists say Switzerland’s growth and inflation data may leave the SNB no choice but to buy foreign currency in an effort to curtail the Franc’s advance.

SNB data in August suggested the bank had pumped billions of Francs into markets, buying foreign currency in an effort to curb the Franc’s strength. A stronger Franc can make it harder for Swiss companies to export their products.

In response to Washington’s declaration, the SNB said on Tuesday that its interventions were designed only to offset the ill effects of too strong a currency. The interventions, which aren’t aimed at giving the nation a competitive advantage, are disclosed in an annual report, the SNB said in a statement.

“They are not aimed at conferring advantages on Switzerland by undervaluing the franc,” the SNB said.

Traders Bracing for Volatile Swiss Franc Swings

In the aftermath of the U.S. Treasury Department’s announcement on Monday, Forex traders are bracing for swings in the Swiss Franc in the weeks ahead. One-month implied volatility in the Euro/Franc Forex pair climbed to its highest level in nearly two months on Wednesday, up by as much as 11 basis points to 4.27%, according to Bloomberg.

Traders Challenging SNB to Make a Move

The U.S. decision “encouraged market participants to test the SNB’s appetite to keep intervening to dampen Swiss Franc strength,” said Lee Hardman, a strategist at MUFG Bank Ltd. in London. “We still think the SNB will continue to intervene after the U.S. Treasury announcement, but it has created some additional uncertainty in the near-term which the market is testing now.”

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