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A 100 Swiss franc banknote rests on top of lower denomination notes in an arranged photograph in Bern, Switzerland, on Wednesday, June 6, 2018. Up for a national vote on Sunday is a measure that would upend the way financial institutions do business by forbidding banks from "creating" money through lending. Photographer: Stefan Wermuth/Bloomberg

(bloomberg)

(Bloomberg) -- The Swiss franc’s rally may be coming to an end as the currency nears levels that some strategists say will prompt the country’s central bank to step in to weaken it.

The franc has climbed 2.5 percent this month to a one-year high around 1.13 per euro as investors seek havens on fears of contagion from market turmoil in Turkey. Either these risks will subside or the Swiss National Bank will intervene to cap any further franc strength, according to Commerzbank AG and Toronto-Dominion Bank.

“We do think that we could be approaching levels that could attract the attention of the SNB,” said Ned Rumpeltin, head of foreign-exchange strategy at Toronto-Dominion, adding it is hard to gauge whether there is a particular “line in the sand” the bank would defend. “The first place where we think they could show their hand would be somewhere near the 1.12 level in euro-franc.”

The franc’s rally this month has upended a steady decline in the past year toward 1.20 per euro, during which the SNB said the currency was “highly valued”. SNB Vice President Fritz Zurbruegg on Wednesday reiterated the bank’s willingness to intervene in the currency if necessary, saying the franc’s recent appreciation highlights how fragile markets still are.

Policy makers, whose next quarterly assessment is in September, may want to keep the rally in check because its appreciation works against the bank’s aim for price stability.

“I think the central bank might already be getting nervous,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank. She expects the SNB to step in when the franc strengthens to 1.10 per euro at the latest, though this depends on how the Turkey situation evolves and if it turns into a wider emerging-markets crisis. “As this lira collapse is obviously politically driven and thus homemade, it is likely that the risk-off move we are seeing will fade,” Nguyen said.

Trade and geopolitical uncertainties are unlikely to blow over any time soon for ING Groep NV foreign exchange strategist Viraj Patel, keeping up demand for havens. “We do think the central bank will curb any major franc strength around the level of 1.12 to 1.13.”

Since early 2015, the SNB has used a negative deposit rate plus a pledge to intervene in currency markets if necessary to counter the franc’s strength. The SNB’s sight deposit data, seen as an early indicator for the central bank’s market activity, suggest that while the SNB intervened in 2015, 2016 and early 2017, it hasn’t been as active more recently.

--With assistance from Catherine Bosley.

To contact the reporter on this story: Elizabeth Howcroft in London at ehowcroft@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Anil Varma

©2018 Bloomberg L.P.

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