Swiss franc drops from peak after SNB rate cut

LONDON: The Swiss franc retreated from record highs on Wednesday after Switzerland's central bank cut interest rates to counter its rise, although concerns about global growth may curb risk appetite and lend the currency further support.

The Swiss National Bank's said the france was massively overvalued, keeping alive the risk of intervention.

It also kept the focus on Japanese authorities who warned again on Wednesday that they are uncomfortable with a rising yen. The yen, considered another safe-haven currency at times of financial stress, held steady against the US dollar, with investors increasingly wary of intervention.

The euro was up nearly 1 percent higher against the dollar at $1.4265, helped mainly by its gains against the Swiss franc and after better-than-expected euro zone retail sales. But widening peripheral bond yields were likely to cap gains.

The euro rose more than two percent on the day to a session high of 1.1149 francs, having hit a record low of 1.0794 on trading platform EBS after the Swiss National Bank's measures. The dollar also rose more than 1.7 percent to a session high of 0.77889 from around 0.7630 francs.

But analysts were sceptical about the latest moves, saying any drop in the Swiss franc was probably a good time to buy it.

"These measures will at best slow the pace of appreciation in the Swiss franc, as real money is seeking the franc and it's not just speculative flows," said Neil Mellor, currency strategist at Bank of New York Mellon.

"These will resonate for a bit but in light of the developments taking place around the world and trend reversals taking place in some stock markets, investors have made up their minds and its going to be a long and hard-fought battle for the SNB."

The euro has lost nearly 11.5 percent against the Swiss franc so far this year, while the dollar has shed 17 percent during the same period. That has put pressure on the Swiss authorities to intervene, with some even calling for capital controls.

The Swiss National Bank will be wary of intervention to weaken the franc, however, having lost nearly $21 billion trying the check the currency's gains between March 2009 and June 2010.

FOCUS ON BoJ

The sharp retreat in the Swiss franc versus the euro saw implied volatilities ease a touch. One-month implied euro/Swiss vols were trading at 17.60 percent versus 18.70 beforehand.

However, risk reversals, a measure of the premium required to hold a put or a call option in a currency pair, continued to show a bearish bias towards the dollar and the euro versus the Swiss franc.

A note from Societe Generale said hedge fund positioning on the Swiss franc showed net selling of the dollar, and they were also increasing their net selling positions on the dollar against the yen.

The dollar was steady against the yen with investors cautious about pushing it lower, given the risks of intervention. The dollar was flat at 77.05 yen , having hit a four-month low of 76.29 yen earlier this week, close to March's record low of 76.25 yen.

Citi analysts in a note said that any intervention by the Japanese authorities is likely to be a unilateral one and is unlikely to reverse the yen's trend. It added that risks stemming from a US slowdown and any likelihood of a sovereign downgrade is likely to keep the dollar under pressure.

"These factors represent medium-term USD negatives, so the fundamental backdrop argues against sustained strengthening beyond any position flush-out," the Citi note said. "The conclusion is that investors should not buy into a broad dollar rally on Japanese intervention."

Attention now turns to the Bank of Japan which could ease monetary policy at a policy meeting later this week. One possible step may be to expand the size of the BoJ's asset-buying scheme, which now stands at 10 trillion yen.

Analysts said despite these measures, investors will seek safe-haven currencies like the Swiss franc and the yen and sell growth-linked currencies like the Australian dollar amid debt market jitters and worries about global growth.

Even Moody's affirmation of the United States' triple-A credit rating failed to calm jittery markets. Moody's announcement followed congressional approval of a deficit-cutting plan.

Instead, markets focused on more data in the run up to the crucial non-farm payrolls numbers on Friday. Latest figures showed US consumer spending dropped in June for the first time in nearly two years and incomes barely rose. That data followed a batch of dour manufacturing surveys on Monday.

COPYRIGHT REUTERS, 2011