by Chris Becker
The SNB (Swiss Central Bank) effectively lowered rates into the negative territory last night, imposing -0.25% on deposit balances and keeping its foot down on the Euro/Swiss Franc cross at 1.20 (via FT Alphaville):
Unconventional in the extreme (Woof! woof!) and shows the SNB wants to hold its floor against the Euro at 1.20, which spiked nearly 100 pips on the surprise move. The SNB looks like a pre-emption against the all but decided QE program from the ECB that will see huge upward pressure on Swiss Franc as the smart/big money crowd seeks a safe haven. Note that the interest rates don’t take into effect until when the ECB meets in January….
From a surprised (who isn’t?) Commerzbank on the 1.20 floor and the credibility of the SNB:
We had in the past argued that the SNB would not take such a step to defend the 1.20 floor in EUR-CHF. If anything, we had thought they’d do it for domestic reasons. We were wrong. The SNB justified this step with the desire to make CHF “less attractive”.
We are surprised, because we think that this move is a massive policy mistake that reducesSNB’s pain in the short run, but brings them into trouble in the long run. Why? EUR-CHF has been painfully close to the 1.20 floor in the last couple of days. Yesterday my colleague Peter had speculated about the possibility that SNB had to be in the market in large volumes. With this rate cut the SNB obviously takes some of this pressure off the table.
But at the same time they are sending a very dangerous signal to the market: The SNB obviously hates interventions. Otherwise, they would have been fine with continuing to buy EUR-CHF around the 1.2008/09 level. The fact that they now used another tool shows: they are unhappy to use the intervention tool in the “unlimited size” that they had always promised. The credibility of the SNB’s intervention policy has been severely damaged this morning.
FX wars continue! Just don’t hit Australia with these negative waves, I mean rates!