ZURICH: A British exit from the European Union could lead to inflows into the Swiss franc too strong for the central bank to counter through currency intervention alone, economists say.
If the franc strengthens beyond parity with the euro, as some experts predict, the Swiss National Bank may be forced to cut already negative interest rates yet again to keep the currency from becoming over-valued.
The possible impact on the franc has been Switzerland’s main concern as Britain’s June referendum on whether to remain an EU member approaches. A stronger currency would make Swiss exports more expensive and competing imports cheaper.
“If the UK votes to leave the EU, then we would expect an appreciation of the euro-franc exchange rate toward parity -possibly overshooting this mark temporarily if the SNB does not immediately cut the sight deposit rate,” economist Nouriel Roubini’s research group said last week.
That would be the franc’s biggest surge since the central bank scrapped its 1.20 per euro limit on the franc’s value in January 2015.
Since then, the SNB has managed the franc with currency interventions and negative interest rates, charging banks 0.75 percent on some deposits and steering three-month money market rates towards -0.75 percent.
But investors looking for a safe haven are likely to head for the franc if Britain leaves the EU, analysts say.
“The Swiss franc may be the best hedge against ‘Brexit,'” HSBC’s foreign exchange strategists said. “The SNB may intervene, but we believe it would, at best, be able to slow the move rather than reverse it.”
The twin pillars of intervention and negative rates have worked so far, SNB Chairman Thomas Jordan has said. But he warns the effect of monetary policy alone was limited.
Traders say ongoing intervention by the SNB – spending as much as 2 billion Swiss francs ($2.06 billion) a week to buy foreign currencies in recent months – has played a big role in stabilising the franc, which the SNB regularly calls “significantly overvalued”.
“Through directed interventions, the SNB has prevented fantasies of franc appreciation from even forming,” said Thomas Stucki, the chief investment office at St. Galler Kantonalbank.
But the impact from a Brexit could overwhelm the SNB’s ability to intervene, HSBC strategists said, leaving the bank unable to stem the franc’s rise.
The SNB could increase interventions to 15 billion to 20 billion francs a week, a range seen in January 2015, said Daniel Kalt, UBS’s chief economist for Switzerland, but most agree there are limits. The central bank’s balance sheet already exceeds Switzerland’s gross domestic product.
Consequently, a rate cut looks likely, Kalt said. “They don’t have many other options left.”
The SNB has not ruled out pushing rates further into negative territory, which would draw more criticism from banks, insurers and pension funds paying deposit charges.
