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SNB’s negative rates panic is not enough

by Ashraf Laidi

This morning’s Swiss National Bank decision to enter negative interest rates (-0.25% on deposits) one week after deciding against it at last week’s quarterly meeting has been prompted by the collapsing ruble situation, which will inevitably trigger fresh safe haven flows into the franc and further complicate the SNB’s protection of the 1.20 EURCHF rate.

The rate cut will be imposed on select deposits effective January 22nd, the same day as the ECB decision, which could thwart any buying of sovereign bonds due to opposition within the executive board.

The SNB move may not be enough. More shall be required as the tide of escalating franc-bound flows from Russia accelerates as long as Russian currency controls are not formalized.

The SNB decision reflects its preoccupation with failure to stem deflationary pressures in light of rapidly declining oil prices, destabilizing speculative pressures into the franc and fears that the ECB’s long anticipated sovereign-bond QE next year fails to avert deflation. The SNB is also aware of the political risk from Greek elections in the event that pro-bailout does not attain majority in subsequent polls.

More to come from the SNB

Just as the SNB was forced into a series of interventions in summer 2011 before eventually formalizing the 1.20 peg, more will be needed to maintain the peg and combat a fresh onslaught of risks such as deflation-inducing oil collapse, event risk in Russia, uncertainty in Greece and exported deflation from China. Speaking of China, the yuan’s offshore rate has weakened to six-month lows against the US dollar, further diverging from the PBOC’s reference rate and raising fears that Chinese products will be imported more cheaply from Europe, thereby further draggong down prices and potentially igniting disinflation.

The chart below shows EURCHF will revisit the 1.2000 level ahead of the Greek elections, ECB decision and renewed shenanigans with the ruble. Perhaps the SNB action becomes a warning to the usual CHF-bound speculation in times of renewed oil selling. But in oder for traders to respect the 1.20 franc a afresh dosage of announced (and unannounced intervention) will be necessary. Once that occurs, USD/CHF will retest the parity resistance and extend towards the next test of 1.0151–the 100-month average, last reached in December 2002.

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