DJ Forex Focus: The SNB Will Be Back, But Not Just Yet

An uncertain outlook for the euro means the Swiss National Bank will probably have to intervene again to stop the Swiss franc from rising too fast.

SNB Chairman Philipp Hildebrand warned as much on Friday.

But with the Swiss economy remaining robust and the franc being sold down against the dollar, the SNB can probably afford to let the euro slide some more against the franc for now.

The central bank managed to keep the euro over CHF1.43 for just about all of last month, by a combination of actually intervening in the market and just threatening to do so.

This SNB activity was hardly surprising as in March, rising fears of a Greek debt default and possible contagion in the euro zone sent the euro spiralling down from CHF1.46. The single currency had spent much of last year trading over CHF1.50.

At the moment, this heavy selling pressure on the euro has abated on hopes of a negotiated settlement for Greece. Over the weekend, the European Union and the International Monetary Fund agreed to provide EUR110 billion over the next three years.

Many remain nervous, however, that Greece may not be able to live up to its side of the deal and that there are still risks of contagion to other euro-zone debtors.

If so, the euro will be even more vulnerable to more heavy losses that some reckon could take it down as far as $1.25 or less, from over $1.33 now.

However, the recent strength of the Swiss economy--as indicated by the continued rise in Friday's KOF survey--suggests that Swiss growth is still accelerating well ahead of the euro zone, and that Swiss interest rates are likely to rise a lot sooner than those in the single-currency area.

Although Swiss money markets are only pricing in a 0.25 percentage-point rise in Swiss rates by the end of this year, banks such as Credit Suisse Group are looking for increases totalling 0.50 of a percentage point, given the strength of consumer activity and the recent sharp rises in house prices.

The SNB itself admitted Friday that it can't keep rates down at their current low level indefinitely. The bank slashed rates down to 0.25% in March 2009 in response to the credit crunch. They have stayed there ever since.

Aside from the strength of the Swiss economy, another reason the SNB may be relatively relaxed about the franc's rise against the euro is the Swiss currency's weakness elsewhere.

Currency strategists at Credit Suisse reckon that the SNB's recent intervention, when the euro slipped to CHF1.4150, was aimed at curbing an excessive rise in the country's monetary condition index, which takes into account the level of rates as well as the level of the currency.

They suggest that recent decline in the euro against the dollar, which has seen the dollar rising against the franc, takes some of the immediate pressure off.

"Further weakness in euro/dollar would create room for euro/franc to grind lower, without pushing the MCI to new highs. Based on our new three month euro/dollar forecast of 1.29, we estimate that euro/franc could fall to as low as 1.40," the strategists said.

See the euro's recent slide against the franc:

So although Hildebrand may continue to talk tough, the SNB may well be a little more relaxed about defending the euro from falling under CHF1.43.

Early Tuesday, the euro remained under pressure in most places as the EUR110 billion rescue package for Greece announced at the weekend failed to provide much assurance.

By 0645, the euro was down at $1.3168 from $1.3191 late on Monday in New York, according to EBS. However, it did make it up to Y124.98 from Y124.80.

The dollar was up at Y94.90 from Y94.59.

Against the franc, the euro was unchanged CHF1.4327.


Bloomberg TNI FRX POV

Reuters USD/DJ
Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)