Brexit blues pressure franc at 2016 high

Bloomberg

The Swiss National Bank kept interest rates unchanged, conserving ammunition ahead of a British vote on European Union membership that has the potential to complicate monetary policy-making the world over.
The SNB, whose currency is sought by investors at times of crisis, held its deposit rate at minus 0.75 percent, as forecast by economists in a survey. Saying the franc remained significantly overvalued, it also reiterated its threat to wage currency-market interventions if needed.
The franc has appreciated more than 2 percent since the start of the month and hit a 2016 high against the euro as market anxiety mounts about the likelihood of Britain leaving the bloc, with polls this week giving ‘Leave’ the lead ahead of the June 23 vote.
“The imminent UK referendum on whether to stay in the European Union has already caused volatility on the financial markets to rise,” SNB President Thomas Jordan said in Bern, where he is briefing the press along with his fellow governing board members Fritz Zurbruegg and Andrea Maechler. “Uncertainty emanating from political events could escalate, hampering economic development.”
The franc erased losses after the announcement and traded at 1.08267 per euro.
“We expect upward pressure on the franc in coming days until the Brexit vote,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “In case of Brexit we expect markets to test 1.05 francs per euro — a level that we expect the SNB to defend fiercely.”
Central bankers from Frankfurt to Tokyo are casting a nervous eye toward Britain, on the grounds that a break from the free-trade bloc would cause financial market turbulence and stymie already feeble global growth.
Federal Reserve Chair Janet Yellen said that a so-called Brexit “is a decision that could have consequences for economic and financial conditions,” and “was one of the factors” officials considered when they decided to keep interest rates unchanged. The Bank of Japan also refrained from altering its policy stance ahead of the UK vote. The Bank of England will announce its policy decision at noon in London.
For Switzerland, a British exit could mean a further rise in the franc against major currencies. That might choke off exports that have just begun to show signs of recovery after the SNB decided last year to give up its currency cap, causing a sharp appreciation of the franc.
Should interventions be needed immediately, the SNB could make use of its trading desk in Singapore as
results pour in early on June 24.

Currency Intervention
Interventions will probably be the SNB’s first line of defense to reign in any currency strengthening, according to a most recent survey of economists, with some also expecting a cut to the deposit rate, already at a record low.
The SNB “may not get around an interest rate to cut minus 0.9 percent or even minus 1 percent,” said Daniel Hartmann, economist at Bantleon Bank AG in Zug.
In the context of a potential Brexit, “currency-market interventions are not a credible instrument in our view.”
Economists say the SNB could take its deposit rate as low as minus 1.25 percent before investors begin to hoard cash in a bid to circumvent the charge.
The SNB also left its target range for three-month Libor unchanged at between minus 0.25 percent and minus 1.25 percent, as expected by economists.
Jordan last admitted to currency purchases at the height of the Greek debt crisis a year ago. The SNB has some 600 billion francs (US$626 billion) of foreign-currency reserves, a sum almost equal to the economy’s annual output. Growth slowed to 0.9 percent last year due to the strong franc.

New Forecast
The SNB expects economic growth of 1 percent to 1.5 percent in 2016, it said, confirming its March projection. The central bank raised its inflation forecasts for this year and next, predicting the rate will increase from minus 0.4 percent in 2016 to 0.3 percent in 2017. Consumer prices will average 0.9 percent in 2018.
“It’s a case of the London blues —we’ve seen it in the markets all week, the referendum is casting its shadow as it draws closer,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “D-Day is only next Thursday.”