All eyes on the Swiss franc

The Swiss franc will remain one of the most desirable currencies in Europe unless the old Deutschemark is resurrected, is the prediction being made by Stuart Thomson, Chief Economist at Ignis Asset Management.

According to Thomson, the SNB's decision to peg the Swiss franc/euro exchange rate backed by unlimited creation of its domestic currency is courageous in the truest Whitehall sense. "It subordinates monetary policy to foreign exchange policy and repeats the 1978 peg in a more sophisticated manner."

"The immediate success of the policy in boosting the euro 8% has been helped by the phony war that often follows major intervention as markets pause to reflect upon the action. The SNB has contributed by selling forward option volatility to reinforce its commitment to maintaining the peg. Theoretically, this commitment is absolute because it can print unlimited amounts of its own currency,” he says.

Thomson believes the flight to safety into Swiss francs reflects both the shortage of Triple A assets and the current crisis in Europe. The euro is not a Triple A currency and the continuing crisis encourages safe haven flows to the franc. The success of the 2011 policy rests on an effective resolution of the sovereign debt crisis. 

"This has become a war of attrition between politicians, financial markets and the ECB.  We believe that it is inevitable that the SNB's commitment will be tested and that the authorities will be forced to back its commitment with negative interest rates, which in practical terms means imposing a charge on large domestic and overseas deposits.”

www.ignisasset.com