Swiss Franc’s Drop Could Finally Give SNB Room to Relax

As the Swiss franc weakens, the nation’s central bank must decide whether it can afford to relax a little.

The currency’s 5 percent decline against the euro over the past three months is good news for the Swiss National Bank in its long-running bid to revive inflation. For President Thomas Jordan and fellow policy makers meeting this week, it could also mean there’s a question over whether the description “significantly overvalued” still applies.

Banks such as UBS Group AG and Vontobel Holding AG say Jordan may not be able just to gloss over the depreciation, driven by an abatement of risk aversion and a stronger euro-area economy. But any shift in language would have to be subtle — to avoid encouraging investors to buy the franc again — and wouldn’t be a signal that the SNB is about to abandon its policy of negative interest rates and currency market interventions.

“The SNB may state the obvious by mentioning that the recent depreciation of the franc has reduced the ‘significant overvaluation’,” said Credit Suisse economist Claude Maurer. “But in line with recent comments of board members, the SNB will most likely remain cautious and indicate that the franc situation remains ‘fragile,’ which would warrant sporadic foreign currency purchases.”

The SNB sounding more relaxed about the currency would stand in contrast to the European Central Bank, where Mario Draghi last week said euro volatility was a source of uncertainty for the economy he oversees. While Draghi’s warning was mild, its appearance still indicated an increasing concern.

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“Significantly overvalued” has been Jordan’s buzzword for the franc for the past two and a half years, but now the exchange-rate situation has changed. The currency weakened to 1.15380 per euro in early August — a level not seen since the central bank dropped its 1.20 cap in 2015 — from 1.07 at the start of the year. It traded at 1.14377 at 8:40 a.m. on Tuesday in Zurich.

The SNB’s statement after its quarterly meeting Thursday will be the focus of investors because no change is expected to any of its policy tools. All economists in a Bloomberg survey see it keeping its deposit rate at a record-low minus 0.75 percent. No press conference is scheduled.

In an interview published on Sept. 1, Jordan noted conditions had evolved, reducing the franc’s “significant overvaluation,” though he stressed the situation could easily reverse and it didn’t make sense to tighten policy. SNB Board Member Andrea Maechler has taken a similar line, calling the negative deposit rate a “vital tool.”

Swiss economic growth trailed that of the euro area in the first half of the year and inflation remains muted, giving rate setters ample grounds to keep policy loose. The SNB, which will update its forecasts this week, in June predicted expansion of about 1.5 percent this year and inflation of just 0.3 percent.

Changing the currency language comes with risks, as it could invite speculators to pile back into the haven franc. Moreover, while it has slipped against the euro, it has climbed against the dollar in recent weeks. The SNB has previously said that it’s “taking the overall currency situation into consideration,” and may repeat that this week.

“The Swiss franc’s exchange rate versus the euro is still markedly above what the SNB would like to see, and they will worry that if they drop the word significantly they will send the wrong signal,” said Timo Klein, senior economist at IHS Global Insight in Frankfurt. “Verbal intervention is always cheaper than actual intervention.”

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