The Swiss National Bank’s (SNB) decision to impose a ceiling on the franc’s value against the euro – a move which will restrict its value to less than 1.20 per euro – is likely to face intense scrutiny as fears over the fate of the euro zone grow, say forex news experts.

The country’s CHF1.2 target was set in September 2011, when the Swiss franc's strength undermined the nation's economic competitiveness in the global markets. In promising to spend an unlimited amount of francs to prevent the euro from dipping below 1.20, the bank has so far experienced reasonable success in convincing the market to honour its self-imposed ceiling.

But forex traders are beginning to wonder whether the SNB’s success will last much longer as the tide begin to turn in the euro zone and an improving picture of economic health begins to develop for the Switzerland. Some forex news analysts are predicting that market pressure could force the SNB to shift the target to CH51.25 earlier than planned. “The SNB’s cause will not be helped by the abating threat of deflation in Switzerland, a risk that underpinned the SNB’S initial commitment to the franc’s floor”, Neal Kimberley, FX analyst at Thomson Reuters told this site.

“The other threat to the SNB's foreign exchange policy is financial markets' persistent concern about the euro zone's highly-indebted countries, and particularly the economic challenges facing Spain as it tries to comply with challenging budget deficit targets.”

Goldman Sach analyst Jim O'Neill (pictured) has also spoken on the issue, suggesting that a raise in the ceiling will become inevitable: "The franc remains clearly over-valued and as their Finance and Economy Ministers have both said, a level around CHF1.35 to CHF1.40 would be more consistent. If the market "won't take it there because of the European crisis, the policymakers are likely to further undertake steps to adjust it," said O'Neill.

So what prompted these suggestions from concerned forex news experts?

“The first skirmish of a long campaign was the euro's brief dip below 1.20 that occurred on April 5 in a thin pre-holiday market”, Kimberley says.
“The SNB's interim chief, Thomas Jordan, on Tuesday termed that move an "anomaly" and reiterated that the central bank was prepared to spend hundreds of billions of francs a day to keep enforce its exchange rate policy. But the market is hardly running scared from SNB rhetoric given the Swiss franc is trading extremely close to the central bank's tolerance limit.”

The primary challenge that Switzerland has to face is the increasing levels of unrest in the euro zone. As Reuters' Neal Kimberley points out, “in comparison with Spain, Switzerland is an oasis of calm”.
But this calm runs a whole lot deeper than just surface perception; presenting perhaps one of the biggest threats to Switzerland’s bid to keep its currency restrained - its own success. On Wednesday, Standard & Poor confirmed that diverse nature of Switzerland’s diverse, high-income, competitive and flexible economy bodes well for an assessment of economic resilience. Robust government finances and high income levels add further insult to injury!

The suggestion from the SNB has been that the rise in consumer prices for March - which outdid analyst predictions of 0.3percent, coming in at 0.6percent - has aided the deflationary pressure on the franc. But "that is hardly enough", says Kimberley, who is keen to point to even the potentially more drastic consequences of capping the franc. "The Swiss Central bank, which expects prices to fall 0.6percent this year, will nevertheless remember that its success in imposing a cap on Swiss franc appreciation against the German mark in 1978 came at the cost of an acceleration in inflation", he says.

Kimberley concludes that as a result of these and the previous factors mentioned, “the arguments justifying the Swiss central bank's stance may be getting chipped around the edges. The stars are aligning for a proper test of the SNB's resolve to prevent appreciation of the Swiss franc beyond 1.20 against the euro.”

Sarah Cox, Writer