SNB Meeting Preview: EURCHF Floor In Focus

Includes: FXE, FXF
by: Ron Finberg

Here we go again, the much anticipated Swiss National Bank Interest Rate Meeting is tomorrow (Thursday) morning. For Forex traders, there is really only one question that matters and that is whether the SNB will change the 1.2000 EURCHF price floor.

Two weeks ago we saw chatter of the SNB applying other measures to weaken the Swiss franc, such as moving towards negative interest rates or taxes on franc denominated deposits. But other than the quick spike earlier in the month the 1.2080, the EURCHF has traded pretty much around 1.2010. This shows that even were the SNB to make such changes, it isn't expected to do much to thwart the rate of flows into the Swiss franc. Also as noted by Zero Hedge earlier this week, the continued rotation of euro holders in francs has led Swiss bond prices to surge, with negative yields on all short term debt up to 5 years out. So we've pretty much are seeing negative rates for a while anyway, without it having much of an impact.

What's Next for the SNB?

EURCHF price floor change?If you noticed above, in the bold we wrote "will change the 1.2000 EURCHF price floor." This contrasts with previous posts of whether the SNB would "Raise" the EURCHF price floor. After this month's SNB Foreign Currency Reserves number topped 300 billion, versus May's drop to 237 billion, it became apparent that the Swiss National Bank has had to go into overdrive buying euro's to support the 1.2000 price floor. The cause of the huge spike in franc demand was due to the combined effect of a crashing euro on Spain's banking woes, along with poor U.S. employment figures.

After a period of steady trading in the Euro between February to mid-May, the SNB now must worry about the costs involved to hold the 1.2000 EURCHF price floor (the high costs involved were the main reason we shorted the EURCHF in April, only to change our view after the 1.2000 figure was tested and held). Its due to this issue that SNB Chairman Thomas Jordan has recently downplayed the chances of raising the EURCHF price floor and alternate methods to weaken the franc have been proposed.

On the other hand, other than Swiss employment figures which have remained robust, Swiss economic figures haven't been too exciting, as domestic Retail Sales and PPI/CPI figures have been lower than expected. Thus continuing to put pressure on the SNB to weaken the franc to support the Swiss export market.

Therefore, it seems that the SNB pretty much has two choices at this point, leave the price floor at 1.2000, or decide on a lower rate, probably 1.1000 and allow for a gradual fall to that level. If the SNB does allow the EURCHF rate to fall, one possible counter effort would be to start buying pounds, yen, and dollars to weaken the franc against those currencies. (This move would ultimately back fire, as it could anger fellow central banks and trigger them to buy francs in return. Therefore we aren't expecting this to occur) With little left in their bag to weaken the franc, it's no surprise that the EURCHF is seeing none of the expected pre-meeting rally today as we head into Thursday's meeting.

Our Opinion

We continue to believe that the SNB feels little political pressure at this point to remove the EURCHF price floor. With pretty much every other central bank applying monetary stimulus in 2012, the SNB can't be criticized for doing the same. On the other hand, it has become apparent that unless things start to get really bad economically in Switzerland, raising the 1.2000 floor may not be necessary. Therefore, we believe that the SNB will try to keep the status quo of a 1.2000 floor alive for at least the short term. However, we don't see much upside other than the occasional spike that could trigger a move to 1.2050.

As far as our EURCHF long position, with risks of the EURCHF moving lower increasing, we don't see risk/reward potential favoring to be long anymore any more. As such, we will use tomorrow's meeting to exit the pair, either by taking any pre-meeting move higher to close the trade or exiting immediately after the meeting if no new actions are applied by the SNB. However, while we see the EURCHF hitting 1.15 more likely than 1.25, we aren't yet taking short position in the pair as statements and actions from the SNB haven't shown any sense of worry for them to change the 1.2000 price floor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Long the EURCHF but depending on the meeting, may close position

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