Currencies appear ready to test Swiss National Bank pledge of keeping the floor under the EUR-CHF at 1.20 level. In spite of recent change at the helm, the central has not indicated major policy change concerning domestic currency, suggesting that its intention to prevent the CHF from appreciating is still valid. We should find out soon enough just how vigorous Swiss authorities are in defending this line in the send. At present, with the EUR-CHF at 1.2060, this test seems almost inevitable, perhaps within days.

While many in Switzerland support these meassures, some are warning about unintended consequences, saying that Franc limit against the Euro may cause the country’s economy to overheat if authorities are not vigilant to its effects. For example, property prices have increased in Switzerland, aided by near zero rates and demand from foreigners looking for employment. This could be mitigated to some degree by increasing the benchmark rate in order to prevent a property bubble. However, such move would put upward pressure on the Swiss Franc and jeopardize the 1.20 EUR-CHF limit introduced in September to fight deflation. Clearly, the SNB will have to walk a fine line.

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Following failed intervention in the Yen market few months ago, Japanese authorities decided to take advantage of strong domestic currency. To this end, they established a fund, which would allow Japanese companies to borrow money for, oversees acquisitions, or buyouts. This program has $130 billion at its disposal, coming from the country’s foreign-exchange reserves and is run by Japan Bank for International Cooperation. Loans from this facility would carry the six-month Libor rate, currently at around 0.34%, which is lower than financing these companies could get from private institutions.

While it sounds good, to date not one Japanese company took advantage of this source of capital. Interestingly, last year Japanese multinationals went on a largest oversee spending spree in at least 12 years, buying about $90 billion worth of foreign companies. Some analysts say that Japanese businesses simply have surplus of funds and do not need to borrow, while others argue they are simply avoiding cumbersome and time consuming government process. Whatever the reason, this program appears to be a failure. There was talk about expanding it, but since there is no interest, it could expire in eight months or so, leaving Japan with intervention as the most viable way to weaken the Yen.

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Coming week is full of big fundamental announcements, including from central banks. On Tuesday, the Bank of Japan will disclose its interest rate decision. The BoJ has no room to cut rates any more, but it could introduce some unconventional measures. After all, the Japanese central bank lags behind its counterpart in this area. For example, it still has plenty room to expand asset purchases within the JPY 15 trillion ceiling  that has so far been announced. In addition, this ceiling could be raised to, say 20-25 trillion. Of course, the real issue here is the ever-stronger Yen, which is not showing any weakness, in particular against the USD.

The BoJ will be followed on Wednesday with policy meetings in the USA and New Zealand. While the RBNZ announcement has the highest probability of some action, all eyes will be on the FED. Nobody expects a change this time, but it will be the first meeting when the central bank releases its interest rate projections. It goes without saying that everybody wants find out when FED expects the first interest rate hike and how much tightening is projected in the following years. Also, in recent few weeks public comments by regional FED presidents seem to signal a willingness to ease monetary policy further this year, the so-called QE 3. Latest fundamental data has been mostly positive, indicating economic growth, well, recovery in the USA. That does not rule out any action, but it probably pushes any announcement of a major policy move out to meeting later in the year. We will find out in few days.

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