On Thursday, along with RBI’s repo rate cut, the Swiss National Bank unexpectedly scrapped its policy of capping the Swiss Franc against the Euro. Alvin T Tan, Currency Strategist at Societe Generale SA discusses the implications of the move on world economy.
Yesterday was a day for surprise monetary moves. Along with RBI’s repo rate cut, the Swiss National Bank unexpectedly scrapped its policy of capping the Swiss Franc against the Euro. Alvin T Tan, Currency Strategist at Societe Generale SA discusses the implications of the move on world economy.
Below is the transcript of Alvin T Tan’s interview with CNBC-TV18\’s Menaka Doshi and Senthil Changalvarayan.
Menaka: It has been a difficult 48 hours for the currency markets across the world. What do you make of what the Swiss National Bank did yesterday, the impact and what this means for the ECB next week?
A: The Swiss National Bank decision yesterday was quite a major surprise and quite a pop on the decision itself which removed the 1.20 Franc cap against the Euro. They also reduced the short term interest rates in Switzerland much more in the negative territory.
So, what they have done is with the interest rate is to attempt to prevent the appreciation of the Swiss Franc following the removal of cap from having too negative an impact on the inflation situation. Going forward it is very clear that without the Euro-Swiss 1.20 floor out of the way now and with the appreciating Swiss Franc deflation in Switzerland is going to deepen. So, the Swiss National Bank clearly will have to do more to try to prevent that.
What is quite important to note is that they are not allowing the Swiss Franc to actually float freely. So, following the decision on removing the floor yesterday we also saw intervention in the market to keep Euro Swiss above the 1 level and indeed it continues to trade above the 1 or parity level today. It traded as low as 85 cents yesterday in the immediate aftermath of the decision. However again intervention has held it up.
What this means is that the Swiss National Bank we will believe will continue to try to manage the currency rather than to allow it to free float ad this is in order to stop the deflationary pressures from piling up too much on Switzerland.
In terms of the bigger market impact we believe that the Swiss National Bank decision is negative for Euro. Essentially it has removed a major buyer of Euro from the market. Yesterday we saw Euro Dollar trading to 11 year lows and quite apart from Euro against dollar Euro Sterling also broke to the downside through quite key technical support levels.
So, big picture is Euro will continue on a down trend. Of course we do have the ECB policy meeting next week on Thursday where sovereign QE policy is expected to be announced.