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Negative Swiss rates may not take much shine off franc as safe-haven
[LONDON] The Swiss National Bank's move to push interest rates into negative territory is unlikely to rob the franc of its safe-haven status among those fleeing riskier assets and the Russian crisis, but it may force a rethink among pension funds.
Other low-risk assets including core government bonds like German bunds and US Treasuries, the yen, the US dollar, and gold could be the potential winners at the expense of the Swiss franc among these longer-term and risk-averse investors, analysts said.
In any case, with the US Federal Reserve set to tighten policy some time next year, in contrast to the SNB's policy direction, the Swiss franc is likely to face prolonged weakness against the more liquid dollar.
The SNB move, which takes effect on Jan 22, will make holding Swiss assets more expensive and less attractive for long-term investors like central banks, who hold US$17 billion in Swiss franc assets, and pension funds. "Pension funds are the ones at most risk as they hold the Swiss franc as a safe-haven asset. Their speed of response is generally subdued," said Sebastien Galy, currency strategist at Societe Generale, New York.
SNB data shows Switzerland attracted 1.4 trillion Swiss francs (US$1.43 trillion) in direct investments and another 1.2 trillion francs in portfolio investments as of the end of the second quarter of 2014.
Outflows are lower, leaving a significant capital buffer that makes the franc a safe-haven asset for global investors.
The SNB said on Thursday that a number of factors, like the Russian crisis, have led to more demand for safe-haven investments. It added that the introduction of negative rates would check upward pressure on the currency.
The central bank capped the franc at 1.20 francs per euro over three years ago to protect the economy from deflation and has pledged to defend that level come what may.
It intervened in currency markets in the past few days for the first time in two years, as the Swiss franc rose to a 27-month high against the euro and threatened to breach the cap.
Analysts said if the euro comes under further downside pressure in the months ahead, the cap is likely to be threatened which could undermine the latest measures. "The SNB will therefore be watching closely the euro's reaction to the possibility of quantitative easing from the European Central Bank," said Jane Foley, senior currency strategist at Rabobank.
She added that the SNB will also be nervously eying the political situation in Greece and related safe haven demand.
Jonathan Webb, head of currency strategy at Jefferies, said the franc would continue to see speculative inflows as long as the Russian crisis persisted. "Next year, though, once the Federal Reserve starts tightening policy, we could see the Swiss franc come under pressure," he said. The Swiss franc fell to a more than two-year low against the dollar on Thursday in the immediate aftermath of the SNB announcement.
The prospect of higher US rates could make the Swiss franc one of the main currencies to borrow in to fund long dollar positions in January, Societe Generale's Galy added.
The SNB's negative rates take effect on Jan 22, the date of the ECB's next meeting, triggering analyst speculation that the ECB could ease policy then, which in turn could put more downward pressure on the euro and threaten the cap. "I don't think that's a coincidence," said Jan von Gerich, chief fixed income analyst at Nordea. "It adds to expectations that the ECB will deliver in January." The prospect of the SNB having to recycle euros bought to curb franc strength has supported euro zone government bonds, especially those of low-risk but higher-yielding countries such as France and Belgium. "The net effect should be positive for euro zone bonds because the ECB flows would be much bigger than any SNB flows,"he said.