SNB Breathes Easy as Franc Drop Rebuts Critics on Two Fronts

For Swiss National Bank President Thomas Jordan, the franc’s precipitous drop to a 20-month low against the euro has come at a helpful moment after an open season for attacks on his policies.

Just over two weeks ago, his institution endured one of the most stinging critiques of its monetary regime in recent years, as a trio of prominent economists accused officials of not trying hard enough to stoke inflation.

That followed a salvo three months earlier from the opposite perspective as the U.S. Treasury under Donald Trump’s former administration branded Switzerland a manipulator, damning its framework for capping currency gains with interventions.

SNB Breathes Easy as Franc Drop Rebuts Critics on Two Fronts

Now, after portfolio shifts by global investors positioning for higher inflation sent the franc down 3% within a fortnight, crossing the 1.10 per euro mark, SNB officials suddenly have breathing space on both fronts.

With the Swiss economy suffering due to the pandemic, the weaker currency can give growth and inflation a welcome fillip. The franc’s downward momentum also means the central bank doesn’t need to lift a finger in foreign exchange markets, avoiding irritation to the new U.S. administration.

“It’s really positive for the SNB, because they don’t need to intervene,” said Alessandro Bee, an economist at UBS Group AG. “Interventions would be a difficult topic when you have to sit down with the Americans.”

Big Spender

The currency drop, triggered by a selloff of haven assets on expectations of a global recovery after the pandemic, is fortuitous for an institution that has spent years and eyewatering sums to rein in the franc and ward off deflation.

Yet even with the SNB’s interventions, and the world’s lowest interest rate of -0.75%, price pressures have stayed persistently feeble.

That prompted Stefan Gerlach, a former Irish central bank official, who is now at EFG International AG, Yvan Lengwiler of the University of Basel, and Charles Wyplosz of Geneva’s Graduate Institute to call for the SNB to revise their inflation target and adopt a new currency strategy.

Their attack last month was one of the most powerful the SNB faced for a while. Officials, who have used aggressive interventions to fight franc gains for more than a decade, responded that they saw no need to overhaul their approach.

SNB Breathes Easy as Franc Drop Rebuts Critics on Two Fronts

That policy is what drew the attention of the U.S. Treasury in December, when it designated Switzerland a currency manipulator along with Vietnam.

Uncomfortable SNB officials responded with defiance that they won’t stop intervening, though data suggest the intensity of any market activity has diminished of late. The amount of cash commercial banks hold with the central bank -- an early indicator for foreign exchange purchases -- declined last week.

Policy makers will probably reiterate their intervention pledge, along with their commitment to negative rates, at the March 25 monetary policy decision.

How or when the Swiss can resolve the disagreement is unclear. Even at a level of around 1.11 per euro, economists still consider the franc strong. It traded at 1.10878 per euro as of 11:09 a.m. in London on Monday.

Standard Chartered strategists expect the franc to drop to 1.1450 per euro in the third quarter before reversing again. “The recent move higher in EUR-CHF has legs,” they wrote in a report.

Whether any drop can generate sustained price growth remains to be seen. With inflation negative for more than a year, and paltry wage growth, pressure may remain on the SNB to follow counterparts such as the European Central Bank with a strategy rethink.

“They need to conduct a review; Is right now the right moment? I’m not sure,” said Banque Pictet & Cie SA economist Nadia Gharbi. “I think they’ll cross their fingers and hope the franc doesn’t appreciate again.”

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