There is a straightforward answer to the question in the headline: more money has been trying to get into Switzerland than get out, which didn’t affect the exchange rate as long as the Swiss National Bank bought foreign currency. As soon as they stopped, the exchange rate adjusted to balance the new set of flows. But a detailed look at the gross flows in and out of the country provides a more nuanced and interesting picture.
In the heady days of 2010-2012, when it seemed as if the European Project was always one secret weekend meeting away from exploding in a fireball of poisonous politics and innumerate economics, Switzerland looked like a nice place to put your money. It was especially attractive if you were a resident of a stressed euro area country worried about wealth taxes, bank failures, currency re-denomination, or all of the above. Read more
As we have already pointed out about Thursday’s unprecedented Swiss franc move following the SNB’s announcement about removing its 1.20 euro level floor and introducing a -0.75 per cent interest rate regime, the real story to pay attention to is what exactly motivated a price surge to that level.
Was it a), that the SNB simply under appreciated the scale of the undervaluation it had been engineering in the franc? Or was it b) that the SNB under appreciated just how thin FX market liquidity is in the market these days?
So as to not sit on the fence, we’re going to take a view and speculate that it’s actually all down to option two. Read more
The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.
Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate: Read more
A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.
Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:
Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.
Beat Siegenthaler, FX strategist at UBS, has been wondering about what the Swiss National Bank may do if the ECB’s measures to weaken the euro begin to test its 1.20 EURCHF floor.
He notes, for example, that there has already been a marked divergence between the EURCHF and the USDCHF:
Here’s the Swiss franc at its weakest level against the euro since the Swiss National Bank put its cap into place in September 2011:
Dark matter may more commonly be associated with physics, space exploration and Professor Brian Cox, but, according to Deutsche Bank’s FX strategist George Saravelos, there’s a good chance that it’s becoming a recognisable force in the world of foreign exchange too.
Of course, whilst you need complex structural analysis of the universe to detect the real dark stuff, in FX its presence is arguably more easily sniffed out. Mostly, says Saravelos, via the closer inspection of short-term derivative flows and the murky parts of balance of payment statistics. Read more
It’s Swiss National Bank reserve figures Wednesday! That glorious day when we get to see how exactly the ingredients of the SNB’s cake have changed. Or to put it more literally, how have they been dealing with the masses of euro assets they are collecting.
Here’s the table in question. What it shows is that the SNB has cut its euro share of FX reserves to 48 per cent from 60 per cent in the second quarter of 2012 while the proportion of sterling and dollars being held increased.
Gasp? Well… yes. Read more
… just as it becomes the new China, which is no longer the old China. Ok? Probably not, but we may as well go through the argument anyway. The idea is that Japan, sick of yen strength which it struggles to combat in a risk-driven world, sticks a Swiss-style floor under its currency.
It’s not the newest idea and there are suggestions that a de facto floor is already in place anyway but the argument, from Société Générale, is worth running through as there is certainly more chance of an explicit floor being announced now than there was when we last visited the idea. Read more
Somewhere in an alternate universe, where Switzerland’s central bank never introduced an exchange rate target for the euro… the Swiss franc is trading at parity with the euro, say HSBC.
(And please, no “in an alternate universe somewhere EVERYTHING is happening” rejoinders.) Read more
Image by Neal Fowler
That’s the Swiss franc floor abiding, unchanged at SFr1.20 despite the recent rumour mongering. Read more
There is plenty of chatter out there about the Swiss franc floor being raised (and just as it celebrates its first birthday party too).
Nobody we have talked to has any actual idea if Jordan et al at the Swiss National Bank will kick the floor up (with SFr1.22 the likely spot if they do) and most don’t see them actually doing it . Read more
That SFr1.20 level will be one year old tomorrow. (We’d buy it a cake but it will probably bring its own.)
Switzerland is the new China and it owns a cake, some of which it just doesn’t find all that appetising. (We admit this might be getting confusing but there is method to our madness.)
The Swiss National Bank has pledged to hold the euro-Swiss franc exchange rate at SFr1.20 no matter how many euros come flying its way (Chinese style currency manipulation.. or, at least, it was) while building up a stack of unwanted euro denominated assets which it has to try and shift via diversification (into a cake of many ingredients rather than a cake made entirely of icky euro). Read more
How many reserve assets does it take to screw a Swiss franc into a euro-sized peg?
Answer: this much (so far): Read more
This is the Swiss franc and the euro over the past year:
From the Swiss National Bank this morning:
The Swiss National Bank (SNB) will maintain the minimum exchange rate of CHF 1.20 per euro and will enforce it with the utmost determination. It remains prepared to buy foreign currency in unlimited quantities for this purpose. Even at the current rate, the Swiss franc is still high. Another appreciation would have a serious impact on both prices and the economy in Switzerland. The SNB will not tolerate this. If necessary, it stands ready to take further measures at any time.
First things first, Switzerland is the new China. It is busy manipulating its currency’s value via an explicit floor — essentially, it will step in and buy as many euros as it has to keep the franc at a level above SFr1.20 per euro — and is accumulating awkward assets as it goes.
Second things second, such a mantle is expensive to wear… and getting more expensive. According to the Swiss National Bank their foreign exchange reserves increased from SFr238bn in April to a record high of SFr304bn in May: Read more
The Swiss have made it abundantly clear that they will defend the 1.20 floor against the euro no matter what:
After EURCHF had been so boring for so long — the euro spiked against the Swiss franc on Thursday:
Swiss franc traders have been pretty bored of late, with the euro/Swiss franc flatlining for months. But it seems they’ve had some rare excitement this week: someone out there is buying as many euros against the franc as traders care to offload.
Naturally, everyone is assuming this buyer is the SNB — in disguise. Read more
The euro is flirting with the Swiss National Bank’s floor at pixel time…
The Swiss boson is a hypothetical condition which is supposed to account for why the Swiss franc has ‘mass’ when all other neighbouring currencies don’t.
A multi billion-euro experiment, operated by BERN (but funded outright by tax payers), is currently under way on the borders of Switzerland and the Eurozone to try and stamp out the asymmetries, ideally by creating something known as the ‘anti-franc’. Read more
Thomas J. Jordan, vice chairman of the governing board of the Swiss National Bank, has made some interesting comments about last week’s sub 1.20 Swiss franc trade against the euro:
What precisely occurred last Thursday? Within just a few seconds, the euro/Swiss franc exchange rate fell from 1.2020 to 1.2000. Despite SNB offers placed in the trading systems, a few isolated transactions occurred below CHF 1.20 per euro. However, at no time did the best available euro exchange rate in the market fall below the minimum exchange rate of CHF 1.20. Thus, for a short time, what is known as a segmented market could be observed, in which transactions below the best price were concluded. This situation was remedied within very few seconds, however, by means of arbitrage.
There’s been some exciting action in the CHF/EUR cross in the last few minutes:
$/€ races ahead of $/£, $/¥ and $/SFr, but $/AUD has made a strong run from behind…
Actually, the thing that jumps out from Table 4 of the most recent FX trading survey from London’s Foreign Exchange Joint Standing Committee is that none of the columns — April 2011 thru October 2011 — are ranked consecutively. (Click to enlarge) Read more
The Swiss National Bank, battered by the resignation of its chairman this week, provided politicians and shareholders with some comfort on Friday by announcing a preliminary profit of SFr13bn (€10.74bn) for last year, the FT reports. The SNB, whose earnings have swung wildly since 2010 because of the soaring Swiss franc, said it expected gains on foreign currency positions of about SFr8bn. A further SFr5bn would stem from profits based on revaluing upwards its large holding of gold bullion. The SNB gave no breakdown of the gains on its foreign exchange holdings, which have ballooned on the back of its market interventions to limit the rise of the Swiss franc. The bank had late last year hinted at gains on its large stock of foreign currencies after the decision in September to set a ceiling for the franc against the euro sharply lowered the Swiss currency’s value.
Breaking via Bloomberg flashes on Monday:
*SNB CHAIRMAN PHILIPP HILDEBRAND RESIGNS Read more