SNB Braces for Brexit Tsunami as Officials Prepare Franc Defense

If Thomas Jordan finds himself in the midst of a foreign-exchange tsunami this month, it won’t be of his own making.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

In January 2015, the Swiss National Bank shook markets when it gave up its cap on the franc. Now central bankers the world over are casting a nervous eye toward London amid fear the U.K.’s departure from the European Union could upset investors, disrupting economic growth and forcing officials to maintain their extraordinarily loose policy even longer. SNB President Jordan warned back in April that a so-called Brexit would cause “enormous stress” in Europe.

A British vote to leave the EU on June 23 would practically guarantee a surge in the franc, popular among investors at times of market stress, according to a Bloomberg survey of 23 economists. The SNB will counter that appreciation with more aggressive interventions, the majority of those polled said. Some even expect a cut to the deposit rate, already at a record low of minus 0.75 percent.

“Obviously Brexit would be a game-changer,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “If the franc appreciated back to the 1.00-1.05 range and held there for a prolonged period, then the SNB would have to consider its options, with cutting the deposit rate further the most likely initial response.”

Having dropped its 1.20-per-euro ceiling on the franc -- described by Swatch Group AG Chief Executive Officer Nick Hayek as a “tsunami” at the time --, the SNB spent the past year using negative interest rates and occasional interventions to take pressure off the currency, and succeeded in weakening it roughly 3 percent in the past 12 months.

Yet with the franc back on an appreciation course and the cost of hedging its gains on the rise, the Brexit vote is threatening to erodemonths of the SNB’s hard work. Last week, the Swiss currency appreciated past 1.09 per euro for the first time since mid-April. It traded at 1.08862 at 2:23 p.m. on Zurich on Monday.

One Week

The SNB’s next quarterly interest-rate decision is scheduled for Thursday. Given that’s a week before the U.K. plebiscite, it’s unlikely to make any adjustments to policy. In addition to keeping the deposit rate unchanged, economists see it holding its target for three-month franc Libor at between minus 0.25 percent and minus 1.25 percent, according to data compiled by Bloomberg.

The central bank’s announcement on June 16 will come with an updated growth and inflation forecast and Jordan and fellow rate setters Fritz Zurbruegg and Andrea Maechler will brief the press in Bern. That’s a few hours before the rate decision of the Bank of England, whose Governor Mark Carney has warned a vote to leave on June 23 could usher in a recession.

In the U.K., polls have been too close to call.

Another cut to the SNB’s deposit rate is “possible,” Zurbruegg, the SNB’s vice president, told Basler Zeitung in an interview published on June 4. Yet a few days later, his predecessor Jean-Pierre Danthine, who has retired from policy making, said that the effective lower bound was “very close to minus 75 basis points” and that to go much lower, “radical measures” that are “simply not democratically enforceable today” would be needed.

According to the 22 economists who answered the question, the SNB can go as low as minus 1.25 percent before investors begin to hoard cash in a bid to circumvent the charge. Concerning interventions, which the SNB uncharacteristically admittedto having done at the height of the Greek debt crisis a year ago, the central bank can grow its balance sheet to 140 percent of annual output, from just over 100 percent currently, the survey found.

SNB will be able to intervene a lot more before its credibility gets called into question,At the moment, the SNB’s policy is broadly supported -- even with a constantly growing balance sheet.