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Switzerland Deepens 'Experiment With Unconventional Monetary Policy' — Analysts React

In a surprise move, the Swiss National Bank bade farewell Thursday to the 1.20 floor set on the euro franc exchange rat e, set in September 2011 to prevent the franc climbing too high against the single currency, and further lowered its interest rate on bank deposits.

The announcement came as a shock for the market, with the euro dropping suddenly from 1.20 to the franc to a low of around 0.85, according to Factset.

Here is what investors and analysts said:

Luke Bartholomew, investment manager at Aberdeen Asset Management: “This is a huge move from the Swiss National Bank. Switzerland’s problem is that it is almost too credible as a safe haven. People desperately want to hold the currency to shield themselves from the risks they see elsewhere, particularly  in the euro area. But with the prospect of quantitative easing from the ECB next week the SNB must have felt their peg was no longer tenable. Instead they have cut rates even more negative and there’s a real possibility that interest rates could go much lower from here.”

Alex Dryden, strategist at J.P. Morgan Asset Management: “SNB’s decision today deepens Switzerland’s experiment with unconventional monetary policy. Only a few weeks ago the SNB imposed its first negative deposit rate since the 1970s and now they have abandoned its floor of 1.20 for the EUR/CHF exchange rate. The SNB hopes that this will dissuade investors from viewing the Swiss Franc as a safe-haven and therefore avoid a negative shock for the Swiss economy. This announcement is yet another item that can be added to a growing list of developments that is driving volatility across global financial markets in the early weeks of 2015.”

Vasileios Gkionakis, currency strategist at UniCredit: “This is a very unexpected development especially on the back of upcoming euro area jitters due to the Greek elections. The SNB said that the Swiss franc is still high but overvaluation has decreased and that the economy has been able to take advantage of this phase to adjust to the new situation. This is a clear and significant divergence from the so-far rhetoric of  ‘enforcing the floor with utmost determination’. The cut in the interest rate on sight deposits by 0.5% to -0.75% will do nothing to stabilize EUR-CHF and USD-CHF. Medium term I am worrying about the implications on SNB’s credibility, the change in language was very abrupt.”

Kit Juckes, macro strategist at Societe Generale: “This is a complete surprise. Although the pressure on the floor has been intense for some time, and was set to remain intense while uncertainty about Greek politics and ECB policy added to safe haven flows into Switzerland from Eastern Europe, acting before the ECB meeting, before the Greek election and while Russian sanctions are still in place, is a huge surprise. In setting such a deeply negative policy rate, the SNB must be hoping that the spike down in EUR/CHF is short-lived, and we may see some intervention.”

Aurelija Augulyte, strategist at Nordea: “The SNB is reacting to comments from ECB  – that the big bazooka sovereign QE is coming. This is in line with their recent comments that the exchange rate floor will be difficult to defend against ECB quantitative easing. Their message that economy has adjusted to new reality is not exactly true: SNB have been revising inflation down for many meetings now. Giving up on inflation target? I think the franc will weaken and EURCHF will be back to 1.20 before long. Fair value for EUR&CHF still above 1.30.”

Adam Myers, strategist at Credit Agricole: “This is due to significant speculative pressure ahead of next week’s ECB meeting, the SNB has been forced into letting the EUR/CHF 1.20 floor break and adopting the less attractive option of paying an even greater premium on sight deposits. Given the magnitude of the move in EUR/CHF, it would appear the size of speculative option positions against Swiss franc were far greater than available positioning data would suggest. With Switzerland caught in the ECB cross-fire, Swiss policy makers were likely left with little alternative adopt the negative rate option.”

Simon Derrick, chief strategist at BNY Mellon: “This also intimates that the SNB either believes that the Russian crisis could intensify or more likely that they believe a programme of quantitative easing from the ECB is imminent. It is worth noting that the SNB this morning also lowered the interest paid on sight deposits to -0.75bp and moved its target range for three month LIBOR to between -125 basis point and -25 basis point.”

Michael Saunders, economist at Citigroup: “The Swiss economy remains stuck in low-flation – or even deflation. Rather, the SNB’s decision probably marks a change of tactics over the mix of monetary conditions, with lower interest rates to offset FX appreciation. However, so far, the overall effect of today’s decision has been to tighten monetary conditions sharply, with the disinflationary effects of exchange rate appreciation far exceeding the stimulus from the rate cut. If this FX appreciation is maintained, the SNB will probably cut interest rates markedly further into more deeply negative territory.”

Beat Siegenthaler, economist at UBS: “The announcement has had a dramatic impact on markets. Today’s decision will have significant ramifications in Switzerland as very few observers expected the floor to be dropped with some arguing that it looked set to remain in place for years. Unless EUR/CHF was to recover back to levels much closer to the old 1.20 floor, the economy could be significantly impacted, as seems well reflected in the reaction of equity prices. Where will EUR/CHF settle after today? The big question is whether investors will want to buy Swiss francs despite substantially negative interest rates and at clearly expensive levels. Nevertheless, safe haven flows have so far demonstrated a remarkable stickiness which can be expected to continue as long as global risk aversion reigns. The SNB might be hoping to be able to stabilise EUR/CHF at around 1.10 which may be deemed a level that the economy can cope with. However, defending such a level might still be quite costly assuming that global risk aversion continues to linger.”

James Lord, emerging market analyst at Morgan Stanley: “The SNB move intensifies pressure on the dollar strengthening trend versus Central Eastern European currencies in particular. This could increase the risk of the eurozone exporting deflation to other parts of the world. Markets may increasingly price a higher risk of policy action from those EM central banks that are battling against their own deflationary pressures. These pressures are clear within the CEE region, and USD/CEE crosses are likely to remain under upward pressure. Furthermore, Hungary and Poland continue to hold CHF-denominated debt – despite the recent progress made on in the redenomination of CHF mortgages in the household sector in Hungary.”

Simon Ward, chief economist at Henderson Global Investors: “The Swiss National Bank has been forced to sever the franc’s anchor to the euro because of the latter’s sustained weakness, driven partly by expectations that the ECB will launch sovereign QE next week. The SNB’s ability to use foreign exchange intervention to hold down the franc has been constrained by criticism of the huge expansion of its balance sheet, now 85% of GDP. In December, the SNB cut interest rates to negative and signalled that they could go lower, but this has failed to stem upward pressure on the currency. The timing of today’s decision may be linked to yesterday’s opinion by the European Court of Justice advocate-general on the legality of the OMT programme, which has reinforced the likelihood of ECB easing.”

Phyllis Papadavid, strategist at BNP Paribas: “The knee-jerk Swiss strength in the wake of today’s policy move is likely to be a source of concern to the SNB: both USD/CHF and EUR/CHF are almost currently 30% lower. We think it likely that the bank will remain vigilant with regard to monetary conditions and the state of Switzerland’s economy. The SNB is likely to remain active in monitoring monetary conditions and in ensuring that the franc stabilises onto a trajectory that is consistent with economic fundamentals. The franc remains an overvalued currency: our suite of valuation models pointing to 1.40 for the EUR/CHF long-term fundamental equilibrium exchange rate and 1.06 for USD/CHF.”

Georgette Boele, strategist at ABN Amro: “SNB dropped a bombshell in discontinuing the floor in EUR/CHF resulting in a 27% jump in the franc versus the dollar and the euro. We expect further Swiss franc strength versus the euro while big buyer of 2-5y euro sovereign bonds are out of the market but impact is limited.”

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