27 Jan 2015
Continued FX intervention remains SNB’s best option – BAML
FXStreet (Barcelona) - The Research Team at Bank of America-Merrill Lynch, observe that the recent weekly sight deposit data suggests SNB has already started intervening in the FX space, and add that continued FX intervention remains SNB’s best option.
Key Quotes
“We believe that continued FX intervention remains the SNB’s best option, even if only to smooth sharp moves in the currency, and available data – namely the weekly sight deposit data – suggests that FX intervention is in fact ongoing. Although sight deposits can increase for many reasons, the sharp increases over the past few weeks are strongly suggestive that the SNB is still in the market, even after abandoning the floor.”
“Having abandoned the floor, however, the efficacy of intervention will be diminished, and unlimited intervention is clearly no longer on the table.”
“In the medium term, the SNB feels that negative interest rates will be a powerful tool, making holding CHF expensive and therefore encouraging outflows that will weaken the currency. It remains to be seen, however, whether the current level of negative rates at -0.75% – which took effect on 22 January – will be enough to trigger significant outflows.”
“We believe sustained CHF strength could prompt further cuts to rates, which in theory could be aggressively more negative, and could also be applied to a larger proportion of deposits in the system. However, we see a practical limit at which costs would be passed on to clients more broadly, prompting withdrawals and a counterproductive tightening of money.”
“In all, therefore, we think the SNB faces difficult choices ahead, and we expect volatility will remain elevated in the near term.”
Key Quotes
“We believe that continued FX intervention remains the SNB’s best option, even if only to smooth sharp moves in the currency, and available data – namely the weekly sight deposit data – suggests that FX intervention is in fact ongoing. Although sight deposits can increase for many reasons, the sharp increases over the past few weeks are strongly suggestive that the SNB is still in the market, even after abandoning the floor.”
“Having abandoned the floor, however, the efficacy of intervention will be diminished, and unlimited intervention is clearly no longer on the table.”
“In the medium term, the SNB feels that negative interest rates will be a powerful tool, making holding CHF expensive and therefore encouraging outflows that will weaken the currency. It remains to be seen, however, whether the current level of negative rates at -0.75% – which took effect on 22 January – will be enough to trigger significant outflows.”
“We believe sustained CHF strength could prompt further cuts to rates, which in theory could be aggressively more negative, and could also be applied to a larger proportion of deposits in the system. However, we see a practical limit at which costs would be passed on to clients more broadly, prompting withdrawals and a counterproductive tightening of money.”
“In all, therefore, we think the SNB faces difficult choices ahead, and we expect volatility will remain elevated in the near term.”