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Swiss franc rises to six year high as central bank stands back -Breaking

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© Reuters. FILEPHOTO: This sign can be seen on the Swiss National Bank’s (SNB), in Bern, Switzerland. October 11, 2021. REUTERS/Denis Balibouse

John Revill

ZURICH, (Reuters) – The Swiss National Bank does not stand in the way the franc’s appreciation according to data published Monday. This is an eye-catching development as the currency that serves as a safe haven rose to the highest point against the Euro in more than six decades.

Investors will find it difficult to believe that the central bank is changing its stance. They have become accustomed to hearing from the SNB about how they would combat negative interest rates, foreign currency purchases and other measures to curb the economy.

Monday’s rise in the Franc to 1.0426 per euro was the highest since July 2015, fueled by new COVID-19 variants, low Swiss inflation and weakening of the euro.

This level is close to the 1:1 ratio against the euro that the Franc reached briefly after Jan. 2015’s SNB policy shift.

The latest sight deposit data, which is a proxy of SNB interventions, increased only by 94 million Francs last week. This represents a small fraction of forex purchases made last year.

Karsten Junius, J.Safra Sarasin economist, stated that the SNB did not defend the 1.05 level with an increase of just 100 million Francs.

Because of positive Swiss inflation and a robust economy, this could be a sign that the SNB may have stopped repressing the franc at the current level.

Economists suggest that the central bank might be holding on to its resources in order to stop rapid, large-scale appreciation.

An immediate response from the SNB was not received to Reuters’ request to comment on Monday’s data, or about the reactions of the economists.

Thomas Stucki is the chief investment officer of St Galler Kantonalbank. He was also the former manager for the SNB’s foreign currency reserves.

PARITY SEEN “IN THE NEXT 2 – 3 YEARS”

“They will not allow the movement to below 1.04 or 1.03,” he said. They will then intensify their interventions.”

Stucki said that the franc would eventually attain parity.

He said that it was clear, based on the inflation developments in Europe and Switzerland, that the Swiss Franc would become more expensive with time. “We do not expect parity to occur next year. But we believe that it will in the next two- to three years.”

Andrea Maechler, member of the SNB’s governing board, stated that the SNB had been monitoring the level of the Franc, even though the central bank did not target any specific rate.

At 1.2%, Swiss inflation is within the SNB definition of price stability. It reduces the need for us to act.

The long-term strategy of the SNB is to fight strong overvaluation. Alessandro Bee, UBS economist, said that the question now is what “strong overvaluation” means.

He said that the Eurozone’s much higher inflation than Switzerland has led to an increase in fair value for the Swiss Franc to 1.11 euros, up from 1.20 in last year.

Bee said that “from this perspective, at 1.05, the franc doesn’t seem over-valued anymore.” This warrants that the SNB has a lower intervention threshold, although it’s not clear where exactly this threshold is.

In the days ahead, the SNB’s stance will be evaluated. This is especially true if there is an increase in demand for the Franc due to the coronavirus omicron.

Charlotte de Montpellier, an ING economist said that the SNB’s situation was becoming more complex. There is the risk that there will be a renewed flight towards safety, as well as a strengthening in the safe haven currencies and thus the Swiss Franc.

Junius, J Safra Sarasin economist, stated that the SNB had done the right thing and not wasted too much money in defending the Franc.

They will attempt to stop appreciations at 1.03. He said that this would be the last defense before parity.

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