Switzerland: Could Interest Rates Go Negative?

Last week’s intervention efforts have put a floor under EUR/CHF. The possibility of more gains was cemented by comments from SNB Member Jordan today who said that Switzerland could offer negative rates on deposits.

Many people may be scratching their heads wondering if the Swiss could actually follow through with its threat but they have!

In the 1970s, Switzerland offered negative interest to discourage foreigners from holding Swiss Francs. Back then, everyone was worried about the value of currencies and were looking for a safe haven and the Swiss Franc was it for many investors. Demand for Francs at that time was so strong that foreign investors had to pay a premium for the privilege of holding it.

Before the SNB implemented negative interest rates, USD/CHF fell 28 percent. In 1972, the SNB restricted bank lending and demanded negative interests of up to 10% per quarter (40% p.a.) on the growth of foreign deposits in Swiss Francs with domestic banks. This led to a 27 percent rally in USD/CHF over the next 6 few months (shown in chart below). The Swiss franc eventually resumed its rally, but not before significant weakness.

USD/CHF

JordanSNB member Jordan’s comment that the central bank will not tolerate further franc appreciation indicates that they are serious about preventing further weakness in EUR/CHF. Should the Swiss National Bank seriously follow through with negative interest rates, it will translate into more gains for EUR/CHF.

EUR/CHF

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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