EVER since the Swiss National Bank (SNB) steamrollered the FX market in September last year, traders have been nervously watching for signs that it is preparing another move. But just how likely is this?
As European financial woes rumbled on, investors took flight into the safety of the Swiss franc, rapidly strengthening it against the common currency. In response to an overheating Swiss franc savaging Swiss exports, the then SNB chairman Philipp Hildebrand announced in September last year that the SNB had put in place currency controls in the form of a minimum exchange rate between the euro and the Swiss franc at SFr1.20. The SNB said that it would protect the franc “with the utmost determination.”
Hildebrand left the SNB under a cloud following allegations that his wife had traded on insider information pertaining to the surprise move. But interim chairman Thomas Jordan has been no less resolute in his defensive currency policies.
Though it earned some respite last week as the European Central Bank seemed to have propped up the Eurozone for a little longer after it pumped a trillion euros of cheap three-year loans into Eurozone financial institutions in two Long-Term Refinancing Operations (LTRO), the Swiss franc remains under pressure from investor flight to safety.
So under what conditions could we see the SNB move to aggressively intervene in its currency and raise the floor still further – to SFr1.2250 or even up to SFr1.2500?
In its minutes from last month’s regular policy review, the central bank drove home its stance that it was prepared to buy foreign currency in “unlimited quantities” to defend the euro-Swiss franc floor and that it “will continue to maintain liquidity on the money market at an exceptionally high level.”
Despite the effects of franc strength on Swiss exports, the SNB expects GDP growth to approach 1 per cent in 2012, revised up from a previously expected 0.5 per cent – though paltry, it outstrips the rest of Europe. The Eurozone is expected to contract 0.3 per cent this year as policy makers try to prevent Greece, Italy and Spain imploding and dragging the rest of the Eurozone into the black hole.
Though the Swiss economy has avoided recession, there have still been warning signs. This week the effects of the strong franc were displayed when Swiss company Barry Callebaut, the world’s largest chocolate products maker, reported a slump in first-half profits. The fall was partly attributed to the overheated Swiss franc melting away profits. According to chief financial officer Victor Balli, net profits fell 11.3 per cent to SFr121.8m, against a consensus of SFr140m.
Should we see further bad results from Swiss industry, the calls for another spirited defence of the currency will grow. Some will joke that the best way to be on the right side of these moves is to marry the Swiss National Bank chairman, but with current chairman Jordan a happily married man, traders should instead look for any signs of long-term deflation risks coming from Switzerland.