Ian Stannard, head of European FX strategy at Morgan Stanley, tells EuromoneyFXNews that it will be economics – not market pressure – that will prompt the SNB to abandon the SFr1.20 floor in EURCHF that it imposed in September 2011. He believes that rising inflation in the first quarter will give the SNB a window of opportunity to step away from its currency policy, allowing the central bank to claim the campaign as a success and thereby enhance its credibility.
“We expect that as inflation rises and moves into positive territory, the SNB may decide that the EURCHF floor is no longer necessary, as one of the main justifications for preventing currency appreciation was to fight deflation,” says Stannard.
“People have been looking at market pressures, but looking at the domestic economic picture in Switzerland holds the key as to when the SNB will remove the floor.”
| Morgan Stanley EURCHF forecast bucks consensus |
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Morgan Stanley’s call is far from the consensus in the market, but Stannard notes that in past instances of Swiss currency intervention, most recently in 2009-10, a rise in inflation led the SNB to exit its currency strategy.
Moreover, he says, in that instance, Swiss consumer price inflation moved from negative levels to over 1% very quickly.
“We believe that a similar development is possible now, and will be watching CPI prints carefully,” says Stannard.
“Prices can turn around quickly in Switzerland, especially when coming from a low base, and, as they do, the SNB will want to avoid excessive inflation.”
| Swiss inflation can turn quickly during FX intervention |
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Morgan Stanley expects EURCHF to fall initially to SFr1.10 by the end of the first quarter of 2012 as the SNB exits its current FX policy, but for it to then recover gradually of its own accord through the remainder of 2013.