SNB Needs To Do More For The Franc Now

The time has come for the Swiss National Bank to raise its stakes.

Sure, the Swiss central bank will probably get the weaker franc it is seeking by the end of this year.

But, the Swiss economy needs that weaker franc now.

Deflation remains a threat with the price of goods and services falling at their fastest annual rate in 50 years and the country's gross domestic product still contracting sharply.

The SNB's apparent intervention to push the franc lower late last week, even though the euro was still trading above a key CHF1.50 level, certainly suggested the central bank's increasing concern.

However, as the exercise showed, the central bank's ability to influence the currency markets is waning.

When the SNB first decided to introduce its own form of quantitative easing through market intervention on March 12, it succeeded in pushing the euro all the way up to CHF1.54. from CHF1.47.

Its surprise move back then was seen drawing a line in the sand at about CHF1.50 - a level that currency players have been reluctant to cross ever since.

The SNB has backed up the move with regular verbal warnings that a strong franc would not be tolerated.

However, as soon as SNB officials suggested that the intervention had worked and that the market should not be looking for any regular defense of any particular level, the market took this an invitation to test the central bank's resolve.

As the euro was pushed down close to CHF1.5020 last Thursday, the Swiss central bank - through its cohort, the Bank of International Settlements - appeared to be back in the market.

The SNB refused to confirm any action either by itself or through the BIS, but the success of the exercise was clearly questionable. This time the euro failed to make it back up as far as CHF1.5150, which suggests that the SNB has an even greater battle on its hands to get the franc lower now.

"Even if the leap in the euro/franc was no more than a product of a nervy market, we should not miss the obvious point that there is clearly the will to challenge the SNB's mettle in the face of its stark warning," noted Neil Mellor, a senior currency strategist with Bank of New York in London.

As Mellor warned: "The SNB may have little choice but to raise the intervention stakes."

Sure, the SNB can wait.

Later this year, a combination of rising risk appetite and widening rate differentials with the euro could well help the euro to rise as far as CHF1.59.

For the moment, though, any downward trend in the franc against the euro is being stifled by the franc's rise against the dollar.

"Dollar/franc below 1.10 is still a drag for a quick euro/franc return towards 1.52-1.54," the currency strategy team at UniCredit pointed out.

So if the SNB wants to get the Swiss economy move north again any time, it will have to be more aggressive in its efforts to push the franc lower against the euro.

Early Monday in Europe, the euro is up a little at CHF1.5076 from CHF1.5068 late on Friday in New York, according to EBS.

The single currency is mostly lower elsewhere, however, as risk appetite is hit by worries over what the Fed will say about the U.S. recovery in this week's open market committee meeting. The euro also isn't being helped by a report in the Wall Street Journal that Germany is facing a major budget shortfall with its debt rising by more than EUR100 billion next year.

The euro fell to $1.3862 from $1.3948 and to Y133.08 from Y134.22. The dollar is also down at Y96.06 from Y96.23.