INTERVENTION FROM THE SNB HAS LIMITS

ONE currency pair staged a wild rollercoaster ride this week, rising 40 points in a matter of seconds only to fall 100 points a few minutes later as markets reacted to every headline to hit the screen. If you think I am referring to the euro-dollar, I am not. The cross in question is euro-Swiss franc, which after nearly three months of somnolent range-bound trading suddenly exploded, catching traders off guard.

The reason for this burst of volatility in euro-Swiss franc was Monday’s Swiss consumer price index (CPI) numbers which printed markedly cooler than expected, declining to -0.1 per cent from 0.2 per cent eyed. The news raised concerns that Switzerland may be facing more deflationary pressures due to the strength of the franc spurring speculation that the Swiss National Bank (SNB) will try to raise the floor in euro-Swiss franc above the SFr1.2500 level. Euro-Swiss franc spiked on the news and traded higher throughout the start of the week since Swiss authorities appeared to confirm the SNB’s desire for higher exchange rates. SNB vice chair Thomas Jordan even stated that: “If the franc suffers an appreciation that’s no longer tolerable, then we will take steps to push deflationary risks out of the way.”

However, within 24 hours Jordan quickly tempered his rhetoric, stating yesterday that it would be “wrong to engage in competitive devaluation,” while signaling no fresh pegs for euro-Swiss franc. Jordan’s moderation triggered a massive stop-filled sell-off in the pair as it plummeted 100 points in a matter of minutes. The fact of the matter is that while SNB intervention has been extraordinarily successful so far, it is not without cost. The easy monetary policy of the Swiss is stoking a real estate bubble in the country that could quickly spiral out of control if the SNB continues to print francs indefinitely. On the other hand, if EU officials can stabilise the region’s credit markets, the massive “fear” premium for the franc could begin to compress. More specifically, if the yield on 10-year Italian bonds drops below the 6 per cent level, euro-Swiss franc could trade towards SFr1.2500 without any help from SNB.