http://www.dailyfx.com/forex/fundamental/article/special_report/2011/01/06/snb_may_interve_in_eurofranc_but_will_decline_stop.html
The Swiss National Bank has left monetary policy exceedingly loose and interest rates at record-lows in order to sustain its expansionary policy. Despite lower interest rates than those in the Euro Zone and the UK, investors have flooded Switzerland amidst aggressive safe-haven demand for CHF-denominated assets. The relatively small and export-reliant country is now dealing with a dilemma: will it be able to withstand the capital inflows and record-strength in the domestic currency?
Since 2009, the Swiss National Bank has undergone a handful of currency interventions (some confirmed, some rumored due to inexplicable swings in the Franc’s exchange rate) in order to curb the franc’s strength. SNB interventions have generally come at times of weak Swiss economic growth and a fear of deflation due to a strong domestic currency.
Switzerland, the world’s 19th largest economy by nominal GDP, is arguably not large enough to sustain such strong safe-haven investor demand. Yet profligate government debts and the ongoing Euro Zone fiscal crisis leave few alternatives for hedges against inflation and flare-ups in financial market tensions.
EURCHF – Daily Chart
Source: FXCM Strategy Trader
The CHF subsequently trades near record-highs amidst impressive investor demand. Some of the EURCHF’s recent advances have been attributed to rumors of SNB intervention. Yet the recent upswing likewise comes on the back of positive economic manufacturing and employment data out of the US and positive results coming out of European equities, providing relief to Swiss exporters.
The key factor going forward will almost certainly come down to whether the Euro Zone fiscal crisis worsens and takes the Euro down with it. As a primary beneficiary of safe-haven flows, the Swiss Franc stands to appreciate on flare-ups in Euro Zone tensions. And though recent price action suggests that the SNB has taken a somewhat-active role in currency market interventions, it seems unlikely that the central bank would be able to offset an especially strong wave of Swiss Franc demand.
Written by the DailyFX Research Team
To contact the authors of this report, e-mail research@dailyfx.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
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