Is the Swiss National Bank throwing in the towel on EUR/CHF intervention?
IFR Markets’ Divyang Shah thinks so:
The SNB has given the green light to tolerating further CHF strength by dropping the reference to intervention in their latest monetary policy assessment. Policy is now being shifted away from an FX target (based on deflation risk) and back toward inflation risks over the medium- to longer-term.
You could take this as another risk-on signal for the euro, we suppose, but excuse us if we call it a Pyrrhic victory instead. If not a retreat strategic withdrawal from the field. The SNB did blow a billion a day on FX intervention back in April after all, for the reward of… er… um…
Intervention might come back, though. Here’s the bank’s assessment on ongoing risks facing eurozone sovereigns:
Should these downside risks materialise and, via an appreciation of the Swiss franc, lead to a renewed threat of deflation, the SNB would take all the measures necessary to ensure price stability.
Although it’d be taking measures not without difficulty, actually.
As Shah continues:
The change in the intervention script reflects the reality of the costs of conducting such large scale interventions in the form of 1) an inability to effectively sterilize the intervention funds 2) the dangers of unsterilized funds at a time of a robust housing market and credit growth and 3) the risks posed to medium to longer term inflation.
A central bank that can’t sterilise? Well, it’s catching.