SNB Can Only Manage Swiss Franc's Rally. By Nicholas Hastings

Buying the Swiss franc has now become nearly a safe bet.

Expectations of a Swiss rate hike are on the rise and fears that the Swiss National Bank will actually block the currency's rally are on the decline.

As Friday's fall in the euro under CHF1.46 showed, the next real 'line in the sand' for the SNB could be at CHF1.44 or below.

In the meantime, the central bank will much more manage the move rather than make any serious attempt to stop it.

See how far the euro has already fallen against the franc:


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A year ago, when the Swiss economy was much weaker and the prospects for the global recovery were much less certain, the SNB waded into the market with all intervention guns blazing as the euro fell under CHF1.46.

For months, further intervention was employed to keep the single currency over CHF1.50 and ensure Swiss exports remained competitive.

However, with the Swiss economy pulling well ahead of its euro-zone neighbors and with Swiss interest rates much more likely to rise in the foreseeable future, preventing further franc strength became increasingly more difficult.

By the start of this year, the SNB had already nearly retired from the market--with its only occasional intervention aimed largely at just slowing the franc's advance.

Late last week, the SNB nearly confirmed the dilemma it is facing when it raised its forecast for growth this year to 1.5% and pushed its inflation forecast up to 0.9%.

The new forecasts increase speculation of a rate rise by the third quarter of this year, ensure increased investor support for the franc as well as suggest that the SNB will be less worried about export growth and more comfortable with the franc's advance.

Market analysts reckoned the change in the SNB's promise to prevent "any excessive appreciation" to a promise to prevent "an excessive appreciation" in the currency is a clear signal the central bank is softening its policy.

The question now isn't whether the franc rallies but how quickly it is allowed to rise.

Ray Farris, a foreign exchange strategist with Credit Suisse in London, suggested this will depend on two things.

The first is the pace of recovery in Germany, which is closely tied to the Swiss economy.

The second is the recovery in Switzerland's own mortgage and property markets.

"Further acceleration should prompt faster tightening in our view," Farris said, suggesting that the rate gap between Switzerland and the euro zone will widen even further, especially given that euro-zone rates are unlikely to rise while policy is being hampered by the debt problems of some members such as Greece.

Early Monday in Europe, the euro was down at CHF1.4562 at 0745 GMT from CHF1.4575 late Friday in New York, according to EBS.

The euro is mostly lower as general market sentiment slumps in the wake of Moody's warning that the top credit rating of both the U.S. and the U.K. are at risk.

A warning from China that other countries shouldn't put it under pressure to change its exchange rate policy didn't help either.

Premier Wen Jiabao told the closing session of the National Peoples' Congress Sunday that China is "opposed to the practice of mutual finger pointing among countries or taking strong measures to force other countries to appreciate their currencies."

However, not all developments were negative, with a small improvement in Japanese consumer confidence as well as talk that euro-zone finance ministers will shortly finalize a bailout package for Greece likely to help lift the market's mood.

The euro was down at $1.3751 from $1.3762 but it rose to Y124.68 from Y124.57. The dollar was up at Y90.65 from Y90.50.