Franc Strengthens As SNB Holds Rate Near Zero, EUR/CHF Floor At 1.20

The Swiss franc edged higher on Thursday after the Swiss National Bank decided to retain the exchange rate cap for the euro and the near-zero interest rate.

The bank noted that it "will not tolerate" further gains in the currency and is prepared to take necessary measures at any time.

The SNB fixed the minimum rate at CHF 1.20 per euro on September 6, 2011 and decided to enforce this minimum rate with the utmost determination.

The central bank reaffirmed it today that it would continue to enforce the minimum exchange rate of CHF 1.20 per euro "with the utmost determination." The bank said it is prepared to buy foreign currency in unlimited quantities for this purpose.

The target range for the benchmark three-month Libor was kept unchanged at 0.00-0.25 percent.

"Even at the current rate, the Swiss franc is still high," SNB said. "Another appreciation would have a serious impact on both prices and the economy in Switzerland. The SNB will not tolerate this. If necessary, it stands ready to take further measures at any time."

Further, the SNB maintained the inflation forecast for 2013 at 0.3 percent and raised 2012 inflation from -0.6 percent to -0.5 percent.

The official data released last month showed that the Swiss economy expanded 0.7 percent quarter-on-quarter in the first quarter of 2012. Annually, the gross domestic product rose 2 percent.

The central bank added that they are more uncertain about euro developments. In yet another blow to Europe's efforts to contain the deepening debt crisis, Moody's Investors Service yesterday downgraded two euro area members, Spain and Cyprus, and placed their bond ratings on review for further possible downgrade.

Spanish government bond rating was lowered by three notches to 'Baa3' from 'A3,' reflecting increasing concerns that the government's decision to seek EUR100 billion financial support from EU will further increase the nation's debt burden. Cyprus's government bond ratings were cut by two notches to 'Ba3' from 'Ba1.'

Traders are also cautious as the second round of Greek elections will take place this weekend. Also, Italy will hold another key bond auction today, with the government aiming to raise between EUR 4 billion and EUR 6 billion by selling medium and longer-term bonds.

The franc gained almost 11-pips against the euro following the SNB, snapping back to 1.2012 from a fresh 2-week low of 1.2023. The euro-franc pair, which hardly breached the 1.20 floor since it pegged last year, has been trading in a range of 1.2023 and 1.2007 so far this month.

Wholesale price inflation in Germany eased to 1.7 percent in May from 2.4 percent in April, the Federal Statistical Office said today.

Wholesale prices of metals and metal ores as well as semi-finished products declined 4.3 percent year-on-year. Month-on-month, the price index fell 0.7 percent following 0.5 percent gain in the preceding month.

The franc advanced above the 1.48 level against the pound after a gap of 3-days, rising as much as 1.4793 immediately following the rate decision. The next upside target for the alpine currency is seen around the 1.4775/80 area.

The Swiss franc also gained almost 15-pips each against the dollar and the yen after the Swiss rate decision, rising as much as 0.9542 and 83.27, respectively before holding steady around 4:00 am ET. The franc is presently trading at 83.10 against the yen and 0.9553 against the greenback.

Japan's industrial production declined 0.2 percent month-on-month in April instead of a 0.2 percent rise as initially estimated, data from the Ministry of Economy, Trade and Industry showed today. Annually, production grew 12.9 percent.

Looking ahead, eurostat is slated to release Eurozone final inflation data at 5.00 am ET. According to flash estimate, annual inflation fell to 2.4 percent in May from 2.6 percent in April.

The U.S. inflation data for May and the weekly jobless claims report for the weekended June 2 are expected to garner market attention in the North American session.