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Market Analytics

Does the SNB need a peg?

Friday, September 14, 2012 - 14:42

On Wednesday the Swiss National Bank pledged to maintain the 1.20 EUR/CHF peg and kept its benchmark interest rate at zero. The regulator defends the national economy from the expensive currency by purchasing euros in unlimited quantities since September 2011. The peg is expensive for the SNB to maintain: foreign-currency reserves increased by 64% to 418 billion francs ($446 billion) during this year. How long will the floor remain and does it really help the Swiss economy?

The Swiss National Bank building in Bern
Photo: genevalunch.com

Strategists at Nomura believe the peg helped to avoid extreme and disruptive currency overvaluation. BBH analysts note that even with the peg the Swiss franc is too expensive and is weighing on the economy, so it was and is necessary to maintain the floor.

Economists at Credit Suisse and UBS believe the central bank will maintain the cap into 2013. According to Credit Suisse analysts, the franc could strengthen significantly now if the SNB dropped its ceiling. However, they expect currency purchases to continue to decrease if tensions on the financial markets diminish further.

Meanwhile, specialists at Citibank are convinced that the euro zone’s economic conditions have strongly improved over the last six weeks, so now EUR/CHF could have been at $1.20 (or slightly above) even without the peg.

Chart. Daily EUR/CHF

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