Swiss National Bank fights the tide of safe haven inflows
SINCE the Swiss National Bank (SNB) intervened in the euro-Swiss franc exchange rate in September last year, there have been few thrills to be had taking a position on the pair. But as the cracks in the Eurozone increase in size, the pressure on the pair has ramped up volatility and interest from traders.
The central bank stepped in to try to bring to a halt the strengthening of the franc, as investors sought it as a save haven in the face of European economic and political instability and the US budget ceiling deadlock. Enforcing a floor in the euro-Swiss franc rate at SFr1.20, the SNB said that it was prepared to protect the franc “with the utmost determination.” The SNB also stated that it was prepared to buy foreign currencies “in unlimited quantities.”
But with the Eurozone facing the possibility of a so-called Grexit and the implications for confidence in the single currency, many are looking to Swiss policymakers. The floor that they put in place to protect against investor inflows overheating the franc looks in danger of being broken, or at the very least costing the SNB billions to defend.
In an interview with Swiss newspaper SonntagsZeitung, SNB chairman Thomas Jordan said that capital controls were among the measures being considered by a government panel to prepare for the possibility of a euro implosion, increasing concerns that the SNB was worried about its ability to maintain the SFr1.20 floor. The words led the euro to climb against the Swissie yesterday, but this rise quickly ebbed away.
If a country is to intervene in its currency in the way that the SNB has done successfully, in contrast to the likes of the Bank of Japan, it needs to act decisively and communicate its intentions to the markets. Jordan’s words send a clear message that the SNB is still prepared to defend its currency. But willingness and ability are two different beasts. This is not the first time that the SNB has intervened in its currency to prevent further strengthening. In 1971, as the cost of fighting the Vietnam war got out of hand, the US saw a sharp rise in inflation and the US was pushed into a trade deficit. After Richard Nixon came off the gold standard in August 1971, markets weren’t convinced that the US government was serious about addressing its financial woes. With the SNB seen as a safe haven, the inflows caused an overheated franc. Then the measures lasted six months before the franc began to strengthen again – dollar-Swiss franc hitting a low of SFr1.50 in 1978.
Should the SNB move to raise its floor to give it some breathing space it will move fast, steamrollering anybody who does not get out of the way in time. But similarly, if the floor finally breaks, expect to see the pair head for lows of SFr1.10. Any traders wanting to take a position on the Swissie should be prepared to move fast.