• and there was less upward pressure on the franc

So says vice-chairman Jean-Pierre Danthine in response to questions about the 1.20 franc cap versus the euro in an interview with Swiss newspaper Sonntagsblick published today

Asked what would have to happen to withdraw the cap Danthine said

We would have to be in a totally different economic situation. Inflation would have to rise significantly, the appreciation pressure on the franc would have to be noticeably lower

He went to to say that there were no inflation risks over the next three years, meaning the minimum exchange rate remained the appropriate tool to guarantee price stability for the foreseeable future.

The SNB introduced the 1.20 cap in 2011 intervening heavily to defend it and inflating its balance sheet, but has not been seen intervening for over a year now. Swiss CPI for Dec was -0.2% vs -0.1% exp m/m and y/y +0.1% vs +0.2% exp.

SNB chief Thomas Jordan recently had this to say on the cap and balance sheet.

On the risks attached to the size of the SNB’s balance sheet Danthine said in the interview

There’s only an inflation danger if the money enters economic circulation. With the SNB bills we have the instrument allowing us to react immediately if that should happen to too great an extent

and said raising interest rates was not an option

If we raise interest rates we put the minimum exchange rate and price stability at risk.

The comments will give comfort to CHF bears particularly in the wake of the recent, and potential, EUR selling elsewhere. The pair has been holding up relatively well but closed on Friday around strong support at 1.2200-15 having failed once again to breach 1.2280 earlier in the week.

We might expect a rally in early trading on the comments but it will be limited if the euro selling continues. A break below 1.2200 targets 1.2165 seen in the middle of December.