SNB Reviews Franc Alert Level Before Middle East Peace Deal

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(Bloomberg) — The Swiss National Bank will this week reveal if it’s too soon to dial down its franc rhetoric before a prospective Middle East peace deal becomes reality.

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With economists and investors widely anticipating no change in the interest rate from the present level of zero, remarks by President Martin Schlegel and his colleagues will draw attention for hints on the path of borrowing costs and any dilution to language on interventions aiming to curb the strength of the currency.

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The decision on Thursday will once again showcase Switzerland’s fairly unique position in the global financial landscape. Unlike the neighboring euro zone, where officials just raised rates, the country faces benign inflation that has been contained by the strength of a currency long seen as a haven in times of international turmoil.

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The franc surged after the US attacked Iran earlier this year, prompting the SNB to warn that it had a heightened “willingness to intervene.” Now, with an interim peace accord set to be signed in Switzerland on Friday, the currency is noticeably weaker against the dollar and euro than before war broke out.

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“Immediate pressure on the Swiss franc has eased somewhat,” said Alexandra Janssen, chief executive officer of ECOFIN Portfolio Solutions in Zurich. “But from a medium-term perspective, you have to expect that that the situation will change and pressure on the franc will increase again.”

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It was in early March, shortly after the outbreak of war, that the SNB issued an unsolicited statement that it was readier than normal to step into foreign-exchange markets. That contrasted with its approach in recent years to use interventions only judiciously.

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Officials have since repeated their language consistently since then. Whether through such actions or with the ebbing of hostilities, the currency has lost some 1% against the euro since then. If a peace deal now holds, the threat may no longer need to be as forceful.

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“The SNB doesn’t usually give updates on such things between its quarterly rate decisions,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “If policymakers want to communicate a different view on the franc, Thursday will be the moment.”

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Junius said the SNB will probably signal readiness to intervene, but might make the message more conditional. He speculated a possible formulation could be to say “interventions appear less urgent.”

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Such a line would chime with Schlegel’s recent emphasis that the franc’s nominal appreciation over the past decade has been much larger than its real increase. The SNB previously stressed that the real exchange rate is more relevant for monetary policy.

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But with the experience of a shaky truce in recent weeks, officials may instead wait to see that hostilities have ceased durably, preserving their existing language to keep maximum flexibility.