Swiss Central Bank "Stands Ready" to Act in Order to Defend Franc Cap of 1.20 per Euro

As officials and politicians in Europe call for weakening of the Euro, as French Prime Minister did today, Switzerland has

SWISS NATIONAL BANKThe Swiss National Bank (SNB) is ready to intervene in order to defend an imposed cap on the Swiss franc (CHF) of 1.20 per euro and could take additional steps to maintain price stability, according to an interview with Thomas Jordan, the chairman of the central bank.

Mr. Jordan said: “The franc is still highly valued. Enforcing the minimum exchange rate of 1.20 is absolutely central to ensure adequate monetary conditions in Switzerland. We continue to stand ready by unlimited currency purchases if necessary.” The Chairman of the SNB made the comments in an interview with Zurich’s German language newspaper, Neue Zürcher Zeitung, published today.

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The Swiss franc, commonly accepted as a safe-haven currency to which investors flock when trying to avoid global macro economic or geopolitical risks, reached its highest levels versus the euro in almost two years last week, trading very close to the 1.20 cap. The ongoing crisis in Ukraine and the resulting clash between Russia and the European Union could be behind the latest appreciation of the CHF.

The SNB set the euro minimum exchange rate cap in 2011 to prevent a strong CHF appreciation from slowing down the Swiss economy. For at least twenty months the central bank has not needed to intervene in the capital markets to maintain the cap, but soon its resolve to do so might be tested. Mr. Jordan commented: “Macroeconomic risks have increased over the last weeks. New geopolitical risks have emerged and we’ve seen weaker than expected international macro data, mainly in Europe and Latin America. There is no doubt that the environment for Switzerland has deteriorated.”

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Overvalued Euro

ecb_logo_ENAdding further pressure to the franc, European officials are calling to weaken the euro to help the region’s economy grow. European Central Bank (ECB) President, Mario Draghi, suggested last week that the ECB might be about to embark on quantitative easing measures or a broad-based asset purchase program as a reaction to weak eurozone growth and inflation.

French Prime Minister, Manuel Valls, today called on the ECB to increase its actions for tackling the problem of an “overvalued euro.” Speaking at a Socialist party gathering in La Rochelle, Valls said the ECB’s June decision to cut interest rates was a “strong signal” but more was needed. “The ECB is finally acting to sustain growth, but it must go even further,” Valls said, according to Reuters.

On Thursday, Socialist President, Francois Hollande, also said the ECB needs to do more to boost growth and counter deflationary risks. So it seems the SNB might soon get caught up in a tug of war over the EUR/CHF versus the ECB.

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