Smashing through the floor: traders test the Swissie peg
IN SEPTEMBER last year, the Swiss National Bank (SNB) intervened in the euro-Swiss franc in an attempt to cool the overheating of the franc. At the time of the move to put a floor under the euro-Swiss franc exchange rate at SFr1.2000, the then-SNB chairman Philipp Hildebrand announced that the central bank was prepared to defend the floor “with the utmost determination.” At the same time, the SNB also indicated that it was prepared to buy foreign currencies “in unlimited quantities.”
Yesterday, euro-Swiss franc traded at SFr1.2038, with Swissie bulls playing chicken with SNB hawks. But in a financial world of ineffective and half-baked policies enacted by central banks, the SNB is one of the few that has the credibility to really move markets fast – as anybody who was steamrollered by September’s intervention will attest.
But with a change of guard after Hildebrand left the central bank under a cloud following allegations of insider trading by his wife, has the previously boasted “utmost determination” begun to wane or is the willing still there? And, more importantly, is the means?
With the Swiss government ever fearful of inflation and the damaging effects of an overheating franc on the country’s exporting economy, Swissie bulls are not only betting against the government’s ability to defend this peg, but also against policy makers trying to raise the floor to SFr1.25000 or even to SFr1.3000.
In the past, speculators have made similar attempts to test the resolve of a central bank – for example George Soros’s winning gamble that John Major’s government would be unable to stay in the exchange rate mechanism – but the Swiss National Bank are in a strong position with deep pockets and control over their printing presses. “There has been a clear loss of momentum in bearish Swissie positions following Hildebrand’s resignation,” says Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank. “Interim chairman Jordan and SNB member Danthine have recently reiterated a strong commitment to the SFr1.200 ceiling against the euro, but there is no hint that a further rise in the ceiling is likely.”
EURO MESS CONTINUES
Without the financial turmoil in the Eurozone, the Swiss authorities would not be in a position where their economy was being put on the rack because of their good management of the Swiss economy. But those troubles that drove haven flows into the Swiss franc are not going to disappear any time soon. “Overall, in the near term, the risks are low that the SNB will cave into pressure, but currencies are like water in that they have to flow somewhere,” says Chris Towner, director of FX advisory services at HiFX. “They don’t displace and if the Swiss franc continues to be seen as a safe-haven and this is the preferred route for investors than the Swiss dam may be tested over time.” Towner adds: “They can build the dam as big as they like, they just need to consider the economic environment.”