ZURICH, Feb 16 (Reuters) - The Swiss franc could soon test the Swiss National Bank’s (SNB) appetite for intervention again, as it turns a corner after sliding in January, analysts say.
The currency is usually seen as a safe-haven, gaining in times of market stress.
But it fell markedly last month despite nosediving global equity markets and oil, and the country’s top economists say this could be due to a number of reasons.
These range from relative calm in European markets and the SNB’s threats to intervene to speculation that the central bank in fact took action in foreign currency markets - despite its weekly sight deposits showing little evidence of major currency buying.
A rout in bank debt, a sell-off of bank stocks reminiscent of the 2008-09 financial crisis and ever-deepening negative rates elsewhere, however, could reverse its downward trajectory, economists say.
A vast majority of economists polled by Reuters predict the European Central Bank will cut its deposit rate to -0.40 percent in early March, for example, posing a headache for the SNB a week before it holds its own policy meeting.
“We could imagine situations where the franc would again appreciate if troubles arise within the euro zone,” UBS chief economist for Switzerland Daniel Kalt said. “In that instance, we think the SNB would intervene again.”
The SNB seeks to make holding francs unattractive by charging 0.75 percent on some bank deposits and intervening on currency markets when necessary to prevent the currency strengthening too much.
That strategy seemed to work as the franc fell to 1.1199 per euro on Feb. 4, its lowest since the central bank scrapped its 3-1/2-year cap at 1.20 against the euro in January 2015.
But it has since tightened up by as much as 2.3 percent to around 1.10 per euro, and investors in the derivatives market are once again betting on its rise against the euro.
The one-month euro/Swiss franc risk reversal — which shows demand for options betting on more gains or losses — shows a slight bias for euro weakness after showing a bias for euro strength less than two weeks ago.
SNB board members say they haven’t seen safe-haven flows into the franc this year and expect it to stagnate or weaken.
But SNB Chairman Thomas Jordan last week warned that turmoil in Europe could revive the franc’s safe-haven role and “quickly put the franc back in the foreground”.
“Worldwide, central banks are pursuing the goal of weakening their currencies, and have an easier job of it than the SNB,” said Felix Adam, chief executive at trading house ACT Currency.
With a ballooning balance sheet and lower sub-zero rates than its peers, some say the SNB’s arsenal is already largely exhausted just as the neighbouring ECB readies more easing steps.
“The SNB would also need to again lower rates, since Swiss inflation remains in deeply negative territory,” Commerzbank analyst Antje Praefcke said. “But its rates are already very low... At some point, it becomes more attractive to store cash under the mattress rather than possibly paying negative interest on a bank account.”
UBS said the SNB could cut rates another 25 to 50 basis points if intervention were to fall short, although it said it did not expect this.
“As long as the ECB doesn’t cut much more than 10 basis points, the SNB will try to avoid a further cut,” Kalt said, citing the collateral damage of negative rates on the pension system and banks. (Additional reporting by Anirban Nag)