LONDON: The Swiss franc fell on Tuesday below levels not seen since the country's central bank removed its cap on the currency, with traders speculating that the bank was intervening to weaken the currency.
There was talk of an informal cap on the franc's exchange rate against the euro at around parity, with many traders still recovering from a 40 percent surge in the franc on Jan. 15 when the Swiss National Bank suddenly removed the three-year-old cap of 1.20 francs per euro.
The SNB declined comment but vice-chairman Jean-Pierre Danthine said in an interview published on Tuesday the bank was ready to intervene. Data suggests the central bank might have been buying euros to weaken the franc ever since it ditched the cap.
The franc fell nearly 2 percent to 1.03845 francs per euro, before recovering to trade at 1.01780 by 1220 GMT, still down 0.2 percent. The franc shed nearly 3 percent on Monday.
"It is a possibility that they are intervening," said Manuel Oliveri, FX strategist at Credit Agricole. "If the euro stabilises around 1-1.05 francs, the SNB will be relatively relaxed."
The euro has been recovering from an 11-year trough of $1.1098 hit on Monday after it became clear that Greece had voted in a new anti-bailout government.
Investors are hopeful that Greece's new prime minister, Alexis Tsipras, leader of the left-wing Syriza party, will be willing to negotiate, cooling concerns of a blow-up with international creditors that could see Greece leave the euro. That led investors to unwind short euro positions.
HEADING DOWN
Nevertheless, the broad direction for the euro remains to the downside, given that the European Central Bank has launched a 1 trillion-euro government bond buying programme that will run until September 2016.
The easy money policy and a weaker euro are giving headaches to central banks in Denmark, Sweden and Switzerland. Both Denmark and Switzerland have responded with negative rates while Sweden is considering a quantitative easing programme.
Deutsche Bank said in a note the Swiss franc was overvalued by 30 percent against the euro and the dollar and the SNB might have to impose negative rates on small-scale domestic savers to make monetary policy more effective.
Swiss money market rates are factoring in chances the SNB may push interest rates deeper into negative territory in coming months from the current -0.75 percent. Swiss franc three-month LIBOR interest rate futures are pricing in chances of a 25 basis-point cut in coming weeks.
BNP Paribas expects a 50 basis-point cut and hopes the SNB will widen the scope of assets affected by negative rates. Currently they are applied only to a small proportion of the 340 billion francs that are held at the SNB.
"Switzerland's negative rates have had little impact but further rate cuts and deterioration in the balance of payments are likely to soften the currency," said Michael Sneyd, currency strategist at BNP Paribas.
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