SNB virus fallout sees franc pushed to a five-year high

Bloomberg

Pressure is intensifying on the Swiss National Bank (SNB) to join policy makers around the world who’ve cut interest rates and increased stimulus in
response to the coronavirus (Covid-19) outbreak.
The central bank hasn’t dropped a bombshell so far this year, despite the franc being at a five-year high against the euro. Instead, data suggest it’s relied on occasional currency interventions. That could change, when its policy decision is due.
“I hope that the SNB can instill a sense of confidence, and that it will indeed strongly emphasise that it can provide all the liquidity to maintain the Swiss finance and banking system,” said Jan-Egbert Sturm, director of the KOF Swiss Economic Institute.
He said liquidity measures are key, as is “as far as possible, to guarantee a relatively stable exchange rate.”
The SNB’s bluntest choice would be to lower its deposit rate, which Jordan has said is still an option. But it’s already at -0.75% — the world’s lowest along with Denmark.
A cut could help maintain the spread with euro-area assets, a cornerstone of SNB policy, and stem appreciation pressure on the franc. However, with markets in turmoil, it might not keep investors at bay. A reduction could also further anger banks and even lead to cash hoarding.
More aggressive selling of the franc would stem the currency’s rise and also boost liquidity in the banking system at a time when central banks are keen to ensure markets don’t seize up for want of funds. But a big increase in market activity could land Switzerland in the crosshairs of the US, as it’s already on a watch list for currency manipulators.
As an alternative, policy makers could attempt to use words first to discourage demand, reverting to a description of the franc as “overvalued” rather than the current “highly valued.”
The SNB could guarantee a stream of funding to the economy by reviving repo transactions, which for years were its policy tool of choice. Such operations are essentially a limited-term, franc-denominated loan with investment-grade
securities as collateral.
Another option is to exempt even more cash from the SNB’s negative rate. That could spur lending, but might make rates on the money market hard to steer.
The BOE and European Central Bank both launched programs to encourage bank lending, and SNB could follow suit. It bought Swiss corporate bonds in 2009, which could be tried again.
The Swiss federal government’s 10 billion-franc crisis-response package includes 580 million francs in emergency credit for small and medium-sized businesses, and banks are mulling a 20-billion-franc fund for companies.