Forex News – Swiss franc rises after SNB maintains cap on euro

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The Swiss franc strengthened sharply against the US dollar and euro after the Swiss National Bank announced this morning that it did not lift the current 1.20 franc cap versus the euro. The central bank also kept monetary policy unchanged and maintained its target for the three-month Swiss franc LIBOR at close to zero.

In the past couple of days the franc had been weakening since many market participants were speculating that the SNB would raise the floor on the euro/franc from 1.20 to as high as 1.23 and so were selling off the franc. As soon as the central bank announced it maintained the current peg.

The SNB set the cap on September 6 in an effort to curb the surging safe-haven franc, citing a threat of deflation and of a contracting economy.

However, the central bank said it continues to believe that the franc is still strong though is expected to weaken.  The SNB warned it will take further action should the economic outlook worsen.

Recent economic data has shown that the Swiss economy is losing momentum as exports have been affected and have slowed down due to the strong franc. Consumer prices have fallen, third-quarter growth was the softest since 2009 and leading indicators such as the KOF barometer have pointed to a further slowdown.

After the SNB announcement, the euro fell to a session low of 1.2257 francs versus 1.2341 before the decision. The dollar also fell to a low of 0.9410 versus around 0.9472 beforehand.

Analyst comments:

PETER ROSENSTREICH, CHIEF FX ANALYST, SWISSQUOTE BANK SA

” The SNB leaves the target rate for 3-month LIBOR at 0.00% but the big news was no change in the EURCHF “floor”. The statement went pretty much as expected with concern expressed over the pace of slower growth and the decline in inflation. The central banks obviously highlighted the escalation in the European credit crisis. For us this was the key reason the SNB did not adjust the EURCHF “floor” higher.

We suspect that the knee jerk reaction in EURCHF will be short lived as most believe that the SNB will “re-peg” in Q1 2012. The SNB credibility remains intact and they reiterated their commitment to the “floor” by (saying they were) prepared to buy FX in unlimited quantities. We would watch for the EURCHF to grind back to its pre-announcement level.  ”

 

THORSTEN POLLEIT, BARCLAYS CAPITAL

” Overall, today’s decisions was hardly a surprise, and we expect the bank to keep rates at record lows for the foreseeable future. What is more, the bank can be expected to keep defending its exchange rate versus the EUR with ongoing unlimited interventions – especially so if the growth outlook deteriorates further.  “