Swiss franc's drop against euro gives central bank room to relax

Swiss National Bank vice-chairman Fritz Zurbruegg against a backdrop of new Swiss Franc notes. The weakening of the currency may reduce its "significant overvaluation".
Swiss National Bank vice-chairman Fritz Zurbruegg against a backdrop of new Swiss Franc notes. The weakening of the currency may reduce its "significant overvaluation".PHOTO: REUTERS

ZURICH •As the Swiss franc weakens, the nation's central bank must decide whether it can afford to relax a little.

The currency's 5 per cent decline against the euro over the past three months is good news for the Swiss National Bank (SNB) in its long-running bid to revive inflation.

For SNB chairman Thomas Jordan and fellow policymakers meeting this week, it could also mean there is some doubt over whether the description "significantly overvalued" still applies.

Banks, such as UBS Group and Vontobel Holding, say Mr Jordan may not be able to just gloss over the depreciation, driven by an abatement of risk aversion and a stronger euro-area economy.

But any shift in language would have to be subtle - to avoid encouraging investors to buy the franc again - and would not be a signal that the SNB is about to abandon its policy of negative interest rates and currency market interventions.

"The SNB may state the obvious by mentioning that the recent depreciation of the franc has reduced the 'significant overvaluation'," said Credit Suisse economist Claude Maurer. "But in line with recent comments of board members, the SNB will most likely remain cautious and indicate that the franc situation remains 'fragile', which would warrant sporadic foreign currency purchases."

The SNB sounding more relaxed about the currency would stand in contrast to the European Central Bank, where its chief, Mr Mario Draghi, last week said euro volatility was a source of uncertainty for the economy he oversees. While Mr Draghi's warning was mild, its appearance still indicated an increasing concern.

"Significantly overvalued" has been Mr Jordan's buzzword for the franc for the past 21/2 years, but now the exchange-rate situation has changed.

The currency weakened to 1.15380 per euro early last month - a level not seen since the central bank dropped its 1.20 cap in 2015, from 1.07 at the start of the year. It traded at 1.14567 at 12.27 pm yesterday in Zurich. It was trading at 0.71 francs against the Singdollar.

The SNB's statement after its quarterly meeting tomorrow will be the focus of investors because no change is expected to any of its policy tools.

Swiss economic growth trailed that of the euro area in the first half of the year and inflation remains muted, giving rate setters ample grounds to keep policy loose. The SNB, which will update its forecasts this week, in June predicted expansion of about 1.5 per cent this year and inflation of just 0.3 per cent.

Changing the currency language comes with risks, as it could invite speculators to pile back into the haven franc. Moreover, while the Swiss franc has slipped against the euro, it has climbed against the dollar in recent weeks.

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A version of this article appeared in the print edition of The Straits Times on September 13, 2017, with the headline 'Swiss franc's drop against euro gives central bank room to relax'. Print Edition | Subscribe