MANY market watchers are questioning whether the eventual successor to Philipp Hildebrand will continue where he left off – aggressively defending the Swiss franc – or whether this will be used as an opportunity to allow the SFr1.200 floor put in place in September to expire.
The supervisory council of the Swiss National Bank (SNB) failed to illuminate the public as to the name of the successor to the outgoing chairman following a six hour meeting yesterday. But once the knee jerk reactions over the resignation of the SNB chairman have died down, just how much does it matter who is at the helm of the Swiss central bank? The news of Hildebrand’s resignation had traders buying up Swiss franc, hoping to test the mettle of the SFr1.200 floor, but this seems to have been wishful thinking as the pair moves back to the SFr1.2100-SFr1.2400 area. “I fail to see why the success of the SNB’s franc policy should have anything whatsoever to do with who is in charge at the top of the bank,” says Stephen Gallo, head of market analysis at Schneider FX. Though the appointment of a new chairman of the SNB will not mean a new policy of promoting a strong franc, the removal of a man seen as a robust policy maker may well trigger a real test of the euro-Swiss peg. “Throughout December we edged closer and closer to the first test of the euro-Swiss floor, so opportunistic games now should only raise the probability that such a test actually occurs,” says Gallo.
The SNB said yesterday that it would continue to defend the SFr1.200 level with “absolute determination”. But in the long term, the likelihood of the central bank making a move to raise the euro-Swiss floor will be driven by deflationary pressure on the Swiss economy. “The ongoing controversies over the SNB chairman’s wife’s recent currency transactions do not alter our bearish outlook on the currency for 2012,” says Audrey Childe, global head of currency for JP Morgan Private Bank. “The still overvalued Swiss franc is a top worry in the Swiss political and business communities and so any new appointment on the SNB front would most likely pursue the currency policy pursued last year.
While Eurozone inflation figures are stabilising, the Swiss figures are quickly deteriorating – year-on-year global CPI is at -0.7 per cent, with core CPI at -1.1 per cent. As the Swiss exporting economy continues to feel the squeeze – manufacturing production is down for the first time in 18 months at 4.3 per cent year-on-year – there will be increasing political pressure for the SNB to raise the floor higher.
The success of the original intervention by the SNB in September relied on its timing, decisiveness and transparency. With Hildebrand out of the picture, we could see the risk of a policy mistake by the central bank should it move to raise the floor too early. If unprepared to defend it, the markets will pounce on the chance to break the SNB’s resolve.