Swiss franc weakness to persist, may keep SNB at bay
* Swiss franc to fall further vs euro in coming months * Negative interest rates on franc deposits to keep it weak * Investors quit franc as euro break-up risks reduced By Anooja Debnath LONDON, Dec 12(Reuters) - The Swiss franc is likely to stay weak against the euro into next year with the debt crisis in abeyance and as banks discourage franc deposits, making further central bank steps to keep the currency down less likely. The franc hit its lowest against the euro in more than two months last week as large Swiss banks said they would impose negative interest rates on deposits in the ultra-low yielding franc to discourage inflows that were eating into their profits. The SNB holds its quarterly monetary policy meeting on Thursday and is widely expected to reiterate its determination to protect a currency cap of 1.20 francs per euro it imposed in September last year to stave off deflation and recession. "The core story is that Swiss commercial banks are discouraging the inter-bank market from holding long Swiss franc cash balances and this is doing the SNB a favour," said Chris Turner, head of FX strategy at ING. "Here we are seeing a private sector initiative to charge negative rates on Swiss franc balances, making it less likely for the SNB to do this." Investors seeking shelter from the euro zone crisis piled into the Swiss franc last year, pushing it close to parity with the euro and harming Swiss exports before the cap was imposed. The euro stood at 1.2118 francs on Wednesday not far from a 2-1/2 month high of 1.2168 francs struck a week ago. Having traded close to the floor between April and the end of August, the euro gained sharply against the franc in early September after the European Central Bank unveiled a plan to buy the bonds of highly indebted euro zone countries. The ECB plan decisively reduced the risk of the euro zone breaking up and, with it, the safe-haven appeal of the franc. The franc has since traded comfortably below the cap. SNB intervention in the currency market has ebbed in recent months with its foreign exchange reserves falling for the second successive month in November. Credit Suisse said last week it was preparing to levy charges on clients' franc accounts and UBS said on Tuesday it would charge other banks for holding Swiss franc deposits. Some analysts said Credit Suisse's move was probably taken to preempt the SNB imposing similar negative interest rates on Swiss franc balances that banks maintain with it. Risks the SNB could still take that measure or raise the cap this Thursday are likely to keep the franc under pressure until the meeting. "Speculation about a higher currency floor and/or negative official target rate (which is not our central scenario) could add to the tailwind for euro/ Swiss franc ahead of the SNB meeting," said Valentin Marinov, head of G10 FX strategy at Citi. SUSTAINED RISE? The franc's recent drop has prompted some strategists to revisit their franc forecasts and predict a period of weakness. "We expect euro/Swiss franc to go to 1.23 in three months and 1.24 in 12 months. We think the Swiss franc is over-valued so we look at a fair valuation of 1.35 francs (per euro)," said Bernd Berg, global FX strategist at Credit Suisse. In the options market, one-month risk reversals in the euro/Swiss franc are still skewed towards euro falls or franc gains. But the one-year risk reversal show a bias for Swiss franc weakness, reflecting growing confidence that the SNB's cap will hold in 2013 and the euro zone crisis ease. Strategists said the rise in the euro against the franc would also be sustained as market players seek higher returns elsewhere. "The risks of a euro zone break up have somewhat reduced," said David Kohl, head of currency research at Julius Baer. "In such an environment investors wonder where they can employ their money and earn positive returns, not where to hide and avoid losses. This will help push euro/Swiss franc up." In a note to clients last week Danske Bank recommended buying euro/Swiss spot at 1.2145 for a 1.25 target and with a stop-loss at 1.20. They expected long franc positions to be cut as the cost of maintaining such positions were significant.
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