From ZeroHedge:
Via Pictet,
Following the recent fall of the Swiss franc against the euro, there were paradoxical comments on the opportunity on both moving the Swiss National Bank’s floor lower (say to 1.25 for example) or on abandoning it altogether (or moving it higher). We believe both options are very unlikely, at least in the coming months. Moving the floor lower would be a bad idea in our view. As we have seen, the extent of the franc’s overvaluation is quite debatable and the lower the floor, the quicker a monetary policy dilemma may emerge. Moreover, in the event renewed upward pressures on the franc occur once again, a lower floor may prove more costly in terms of FX interventions. In any case, the SNB was relatively clear recently in saying that it has no plan to move the floor.
On the other hand, now that the euro is far higher than 1.20 francs, it could look tempting for the SNB to take the opportunity to simply abandon the floor. However, this would be quite a risky bet. As mentioned below, a new bout of the euro crisis may break out at some stage or another over the coming months, propelling the franc sharply higher once again. Then what would the SNB do? Reset a floor? In short, by abandoning the floor already now, the SNB would be playing dangerously with its credibility. In our view, we continue to believe the floor might be abandoned (or possibly raised substantially) at some stage, but most likely not before next year.
The franc has weakened sharply against the euro this year
Over the past week or so, the Swiss franc suddenly weakened significantly against the single currency, reaching almost CHF1.255 per euro, its lowest level since May 2011. Behind the scene, this sudden decline was linked to a further substantial reduction in the systemic risk associated with the euro crisis and the widespread practice of charging penalty rates on CHF deposits. However, the short-term trigger of the CHF fall was clearly last week’s surprisingly “not-so-dovish” ECB press conference.
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What to expect for the future?
The first thing to keep in mind is that the stability that prevailed on the EUR/CHF during most of last year lies in the fact that the SNB had to sell huge amounts of francs. According to our rough estimates, between mid-May and mid-September 2012, SNB FX interventions reached a massive CHF190bn. A good part of the money invested in the franc during that period was probably “hot money” seeking protection from a potential euro breakup. This means that potentially substantial amounts may leave the franc if the euro area systemic risk is reduced further. Moreover, short-covering probably played a significant role in the franc’s recent downward move and this may continue, at least in the short run. The consequence is that it is extremely difficult to figure out up to what point the recent appreciation of the euro against the franc will go in the short run, but we believe the move may well extend further for a while....MORE
