Swiss Central Bank Fires Warning Shot on Currency

The Swiss central bank appears to have taken its most significant steps to weaken the Swiss franc in two years, after looming rate cuts from U.S. and European central banks put upward pressure on the currency.

The Swiss National Bank began selling francs into the market last week, a move that was reflected in an uptick in the so-called sight deposits that lenders use to hold reserves at the central bank. The sight deposits, a closely watched indicator of foreign-exchange intervention, grew by 1.7 billion francs ($1.7 billion), which is the largest amount in about two years since summer 2017, according to analysts.

“This looks like intervention,” said Thomas Flury, global head of currency strategy at UBS Wealth Management. “It is the highest increase since the French election period in 2017, when they were last intervening.”

The Swiss National Bank declined to comment Monday.

The Swiss franc hit what many analysts see as a key level last Wednesday, which is 1.10 francs per euro, a level it hasn’t breached since early July 2017. At the end of April, one euro bought 1.14 francs, while in May last year it was 1.20 francs.

The Swiss central bank’s actions haven’t moved the franc’s price drastically. Monday, the currency traded at 1.105 francs per euro, only slightly weaker than it was last week.

Looser monetary policy in the U.S. and Europe puts upward pressure on the franc by making Swiss investments relatively more attractive, or less unattractive, by shrinking the difference in interest rates between the Alpine nation and elsewhere. Switzerland’s economy is typically viewed as strong and stable, making it a haven for investors.

The European Central Bank didn’t cut interest rates last week, but President Mario Draghi has been preparing the market for rate cuts and more bond buying in his recent speeches. He further emphasized that message in Thursday’s monetary policy statement.

The Swiss franc weakened after the ECB’s decision, but remains high compared with the recent past.

“Intervention has been a longtime coming, the franc has been rising in recent months,” said David Oxley, senior Europe economist at Capital Economics.

Data on Swiss sight deposits is publicly available only up to the middle of last week, so the central bank’s move came before the latest round of rate-signals from the ECB.

Mr. Oxley and other analysts said the recent fall in the franc looked more market driven than central bank driven.

A market in front of the Swiss National Bank in Zurich.


Photo:

arnd wiegmann/Reuters

JPMorgan analysts expect the franc to continue to strengthen, in part because the Swiss central bank wouldn’t want to be seen intervening and thereby attracting the ire of the U.S.

“President Trump’s ongoing forays into the FX market will further incline the SNB to sit on its hands and leave [the franc] unrestrained,” they said in a note Friday.

However, the central bank could have masked its intervention, but didn’t, according to UBS’s Mr. Flury.

“It could have done this via options and then we wouldn’t see it,” he said. “Maybe they wanted to show the market that they are around.”

Mr. Flury added that Switzerland could handle some further currency strengthening because on a fair-value basis—calculated using relative purchasing power—the franc is weaker against the euro than it was when the SNB last intervened to weaken the currency.

When the ECB does cut rates, Switzerland is likely to follow suit: a further quarter-point cut would take the Swiss policy rate to minus 1%.

Write to Paul J. Davies at paul.davies@wsj.com

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