Tuesday’s FOMC decision to extend a low rate environment until at least 2013 caused both the euro and the dollar to weaken quickly and significantly against the Swiss franc.
Never to be upstaged, the Swiss National Bank has now come out with its own counter-appreciation move for the Swiss franc.
It’s preparing to a) ease tension in CHF liquidity via FX swaps –presumably to Central and Eastern European counterparties were the strong franc is doing untold damage — and to b) increase sight deposits in its reserves (a move that will expand monetary base money and keep rates extremely low, possibly even sending them negative).
In the SNB’s own words:
Swiss National Bank expands measures against strong Swiss franc
The substantial rise in risk aversion on the international financial markets has further intensified the overvaluation of the Swiss franc in the last few days. In the light of these developments, the Swiss National Bank (SNB) is taking additional measures against the strength of the Swiss franc. It will again significantly increase the supply of liquidity to the Swiss franc money market. The SNB aims to rapidly expand banks’ sight deposits at the SNB from currently CHF 80 billion to CHF 120 billion.
To accelerate the increase in Swiss franc liquidity, the SNB will additionally conduct foreign exchange swap transactions. The foreign exchange swap is a monetary policy instrument which the SNB uses to create Swiss franc liquidity. It was last employed in autumn 2008. The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability. The SNB is keeping a close watch on developments on the foreign exchange market and on financial markets. If necessary, it will take further measures against the strength of the Swiss franc.
Critically, the SNB once again uses the adjective “massive” to describe the overvaluation of the Swiss franc, while pinpointing to what degree that poses deflationary risk to the Swiss economy.
As to the scale of the intervention, Citi’s G10 FX strategist Valentin Marinov says it’s ‘huge’:
I think this is huge, it increased the amount of liquidity by CHF90bn in total – almost 20% of GDP. It also announced they will use FX swaps – contracts to temporarily sell CHF. It used these extensively in 2009-2010. As a guidance, EURCHF jumped 5% in March 2009 when they first announced the interventions.
Related links:
Oh Schweizer! – FT Alphaville
The SNB can change your franc in seven days! - FT Alphaville
The Swiss franc’s safe-haven status, a visual interpretation - FT Alphaville