The SNB Won the Battle, Cat and Mouse Game Continues

By Russell Glaser

The SNB initiated another round of liquidity measures to weaken the Swiss franc. Instead of opting for more severe policies such as a currency peg to the euro or setting a floor beneath the EUR/CHF the SNB chose to increase the liquidity measures it provides to the financial system. The initial reaction by the market was to buy the CHF but a euro rally and a relative improvement in market sentiment has helped to push back speculators, giving this round to the SNB. The question then is what will happen to the CHF when markets tighten up in a “risk-off” mode?

Rather than secede control over its sovereign monetary policy to the European Central Bank the SNB chose a more conservative route and expanded its sight deposits from 120 bn to 200 bn. There have also been actions taken by the SNB in the money markets and rumors of intervention in the FX forward market. The initial reaction by the market was that of disappointment as expectations had been building for more severe monetary policy measures. This past weekend the Swiss press was swarming with headlines of an SNB plan to peg the CHFto the euro. Following the announcement the EUR/CHF came off of the 1.15 level to trade as low as 1.12. But an upswing in market sentiment and a euro bid helped the pair claw its way back to trade at 1.14.

The failure of the SNB to rule out a peg to the eurodid two things; it kept FX speculators on their toes and did not eliminate any future options the SNB may take. This may bring further pressure on the CHF in the near term as market players feel the central bank may have lost a tad of credibility when it did not make its intentions clear to the market . It also allows for the use of the CHF as a safe haven should markets once again shift into “risk-off” mode as was the case last week. By leaving the option for a peg to the euro or a floor put under the value of the EUR/CHF the SNB still retains additional tools to address CHF strength. Note that the EUR/CHF has risen almost 15% from last week’s low through a combination of tough talk and policy tools. The cat and mouse game continues.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.