Yesterday the euro / franc exchange rate temporarily fell below par for the first time in over seven years on the wake of fears that sanctions / retaliation between the West and Moscow will eventually lead to eurozone stagflation. After hitting a low of 0.99, the euro is bouncing 0.65% today to 1.0107 francs. It is not clear whether the Swiss National Bank (SNB), which has always been very sensitive to forex dynamics, has intervened directly on the market in the past few hours given that the common currency is recording gains against the other safe-haven currencies, the dollar and the yen.
However, three days ago Andrea Maechler, a member of the board of directors of the Swiss central institution, was very clear in an interview with Schweiz am Wochenende, stating that the SNB was monitoring the situation and was ready to take measures if necessary to prevent an overvaluation of the franc. “At first we noticed that the appreciation was rather subdued relative to global uncertainties, but that changed over the course of the week,” the economist said. A clear sign that a level below par may not be tolerable for Bern.
At the moment, “observing the data on overnight deposits, usually used as a signal to determine the intervention of the central bank on the foreign exchange markets, we only highlighted a slight increase which means that at the moment the Bns has not yet intervened massively”, explained Filippo Diodovich. , senior market strategist of Ig Italia, at milanofinanza.it. “We believe that the defense of the euro / franc parity may involve the central bank more than expected with further interventions on the currency markets to defend the psychological threshold of the exchange rate of 1. In the event of a further increase in cash flows for safe haven due to negative developments for the Russian-Ukrainian conflict we expect the institute will not commit the
Credit Suisse is also on the same line of thinking, according to which the dynamics of the exchange rate does not induce the SNB to intervene massively with specific measures to prevent a further appreciation of the safe haven currency par excellence. Moreover, it has not done so in the last 12 months, ie since the euro had peaked above 1.1 francs. Credit Suisse cited two reasons for the SNB’s stop. First, the risk of deflation, which has characterized the country in the last decade, has disappeared and with it one of the main arguments of the central bank to weaken the franc. Indeed, in February inflation rose to 2.2% year-on-year, to its highest level since October 2008. Credit Suisse experts estimate that the readings in the coming months will settle at around 2%. Secondly, the inflation-adjusted and trade-weighted exchange rate has not yet reached extreme levels. With an exchange rate of one franc for one euro, the real exchange rate would be around 2% below the level of January 2015, when the SNB decided to abandon the defensive threshold of 1.2 in the exchange rate against the EUR. Compared to the peak of the Covid-19 pandemic, the cross is 1.3% lower, they told Credit Suisse.
Finally, while the franc attracts investors, the euro remains under pressure on the other. Despite record-breaking inflation in the region, “we expect the ECB to remain accommodative, delaying the removal of the monetary stimulus that we previously expected for this week. However, this delay will need to be more than compensated for later by further tight, if the ECB is serious about keeping inflation expectations in the Eurozone well anchored. For now, the trend for the euro appears to remain down, “said Enrique Diaz-Alvarez, Ebury’s chief risk officer. (All rights reserved)
