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Swiss franc weakens for second straight day amid talk of intervention
[LONDON] Switzerland's franc tumbled on Tuesday below levels not seen since the Swiss National Bank removed its cap on the currency, with traders speculating that the central bank was intervening to weaken the currency.
There was talk of an informal cap on the franc against the euro at around parity. Many traders are still recovering from a 40 per cent surge in the franc on Jan. 15 when the SNB suddenly removed the three-year-old cap of 1.20 francs per euro .
SNB vice-chairman Jean-Pierre Danthine said in an interview published on Tuesday the bank was ready to intervene. Data suggests the central bank might have been buying euros to weaken the franc ever since it ditched the cap.
The franc fell 1.6 per cent to 1.0323 francs per euro by 0850 GMT, having shed nearly 3 per cent on Monday.
"It is a possibility that they are intervening," said Manuel Oliveri, FX strategist at Credit Agricole. "If the euro stabilises around 1-1.05 francs, the SNB will be relatively relaxed."
The euro has been recovering broadly from an 11-year trough of US$1.1098 hit on Monday after it became clear that Greece had voted in a new anti-bailout government.
Investors are hopeful that Greece's new prime minister, Alexis Tsipras, leader of the left-wing Syriza party, will be willing to negotiate, cooling concerns of a blow-up with international creditors that could see Greece leave the euro. That led investors to unwind short euro positions built before the Greek elections.
Nevertheless, the broad direction for the euro remains to the downside, given that the European Central Bank has launched a one-trillion-euro government bond buying programme that will run until September 2016 That easy money policy is giving headaches to central banks in Denmark, Sweden and Switzerland.
Swiss front-end money market rates are factoring in chances the SNB may push interest rates deeper into negative territory in coming months from the current -0.75 per cent. Swiss franc three-month LIBOR interest rate futures are pricing in chances of a 25 basis point cut in coming weeks.
BNP Paribas expects a 50 basis point cut and hopes the SNB will widen the scope of assets affected by negative rates. Currently they are applied only to a small proportion of the 340 billion francs that are held at the SNB.
"Switzerland's negative rates have had little impact, but further rate cuts and deterioration in the balance of payments are likely to soften the currency," said Michael Sneyd, currency strategist at BNP Paribas.