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The Swiss National Bank is in a bind about how to rein in the franc’s unwanted strength without being labeled a currency manipulator by the U.S.

Policy makers, who’ve resorted to tactics including massive foreign exchange interventions over the years, now have a new complication. SNB President Thomas Jordan has to balance the need to protect the economy with the risk of trouble with the U.S. Treasury, which has put Switzerland on a watch list.

The franc is up 2% against the euro so far this year, and this week reached 1.061, the strongest since mid 2015. The steady advance ought to provoke SNB interventions to drive it back, yet data suggest the central bank hasn’t been very active in the market.

“The surge in the franc has taken us by surprise as we thought the SNB tolerance for currency appreciation would be surpassed by now,” said Olivia Alvarez Mendez, a foreign exchange market analyst at Monex Europe Ltd. in Madrid. With Switzerland back on the U.S. monitoring list, “markets are testing SNB resistance.”

Official statistics on interventions are only published once a year, but weekly data on sight deposits -- the cash commercial banks hold at the SNB -- can offer clues.

A spokesman for the SNB declined to comment on whether there have been any interventions. The currency was little changed at 1.0622 per euro at 09:14 am in Zurich on Friday.

The franc has been near this level before, notably in June 2016 when the U.K. voted to leave the European Union. That was one of the rare occasions when SNB officials, who generally keep mum about when they’re in the market, actually said they’d intervened.

Prior to that was January 2015, when Jordan unleashed a market bombshell by scrapping the SNB’s currency cap with zero warning.

The franc’s strength is a function of investor risk aversion, with unease related to U.S.-Iran tensions to the coronavirus driving trading since the start of the year.

However, this is also a euro story, with the single currency taking a beating versus the dollar, sterling and the yen in recent days. That’s one more reason the SNB could be staying on the sidelines. While the euro plays an outsize role in Swiss trade, policy makers take the “overall currency situation” into account.

There’s also no economic imperative to act. Growth has slowed, but it’s not in crisis, and prices aren’t falling as they were in 2015.

Switzerland already fulfills two of three criteria for being a currency manipulator in the U.S.’s eyes. If it wants to avoid antagonizing President Donald Trump’s administration, one option is to resist interventions and instead cut interest rates.

They’re already at a record-low -0.75%, but Jordan says there’s room to reduce if needed. That wouldn’t be welcomed by banks, which blame sub-zero rates for hurting profitability.

“They’re probably being careful,” said David Marmet, an economist at Zuercher Kantonalbank. “If the coronavirus situation stabilizes, then I think the current levels are probably acceptable for the SNB.”

(Updates with franc in sixth paragraph)

--With assistance from Richard Jones.

To contact the reporters on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net;William Shaw in London at wshaw20@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

©2020 Bloomberg L.P.

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Why Switzerland struggles with dirty gold

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