Swiss National Bank likely intervening to weaken franc: UBS

[ZURICH] The Swiss National Bank (SNB) is probably stepping into the market to weaken the franc, according to economists at UBS Group.

“Current market conditions indicate an elevated risk of SNB intervention,” Florian Germanier, Maxime Botteron and Constantin Bolz said Wednesday in an emailed note. “With the likelihood of SNB FX purchases rising, we believe the risks to EURCHF are now more skewed to the upside.”

The analysts identify five criteria which have in the past prompted interventions of the central bank. They include:

• Rapid appreciation of the franc against the euro; measured by the 14-day relative strength indicator for EURCHF.
• Real overvaluation of the franc; measured by the deviation from the trend in the monthly real effective exchange rate.
• Risk perception; measured via EURCHF three month 25-Delta risk reversal.
• Deflation risk; measured by annual inflation reading and estimated impact of franc appreciation.
• Interest rates being close to their effective lower bound.

After the recent surge of the franc against the euro, two of the five criteria are met and a third is on the brink of being met, they said.

While the probable interventions of the SNB are weighing against still elevated safe-haven demand for the franc, the economists concluded that in sum the currency may become less attractive and gradually rise towards 0.94 euros per franc, up from current levels around 0.92. BLOOMBERG