Euro lends a hand to the SNB - SocGen

Alvin T. Tan, Research Analyst at Societe Generale, notes that the largest monthly move in EUR/CHF since the SNB franc cap policy was abandoned in January 2015 may have been celebrated in Zurich, but it was also an indictment of the SNB’s unconventional policies.

Key Quotes

“The combination of negative interest rates through the 10-year tenor and a burgeoning central bank balance sheet in Switzerland failed utterly to weaken the Swiss franc.”

“What finally weakened the franc is a combination of mounting ECB tightening expectations, euro appreciation, and narrowing European peripheral spreads. All of these are contributing to franc depreciation, yet none of them is of course under the SNB’s control.”

“More broadly, there is growing evidence that unconventional monetary easing has failed to weaken currencies in Switzerland, Japan and the euro area.”

“The Swiss experience provides a lesson to Japan given the potentially parallel situation there. The trade-weighted yen is little changed year-to-date despite the rising BoJ balance sheet and negative interest rate policy. The BoJ has become reliant on higher global bond yields and buoyant global risk sentiment to drive the trade-weighted yen lower.”

“Consequently, any expectation that the BoJ is moving to normalise policy is likely to trigger broad yen appreciation and would be a major policy error.”

“As for EUR/CHF, it has already reached our new year-end target of 1.15. Given the expected direction of the European dynamics we have outlined, we think EUR/CHF 1.20 is likely to be achieved by 1Q18.”