SNB stuns market with franc action

By Peter Garnham in London and Haig Simonian in Zurich
Swiss National Bank

SNB stuns market with franc action - FT.com

The Swiss National Bank stunned financial markets on Tuesday by setting a ceiling for the Swiss franc against the euro in an attempt to prevent the strength of its currency from pushing its economy into recession.

The central bank said it would set a minimum exchange rate of SFr1.20 against the euro. The SNB action came after previous measures to weaken its currency proved ineffective as the worsening eurozone crisis prompted a flight to safety by investors, boosting haven demand for the franc and sending it up to record levels.

Analysts said the move raised the stakes in the global currency war as countries vie to protect their exporters and, by removing a release valve for investors looking for a haven from current market turmoil, could heighten instability on financial markets.

“The start of full-on currency wars has started in earnest,” said Maurice Pomery, chief executive at Strategic Alpha. “After currency wars come trade wars and as we see the exporting world pressured as the developed world contracts, tensions will rise.”

The surprise move prompted the franc to fall 8.2 per cent against the euro to SFr1.2015 in a matter of minutes and to lose 8.8 per cent against the dollar to SFr0.8563.

Switzerland’s stock market surged, with Zurich’s SMI gaining 4 per cent.

The SNB said the current massive overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of pushing it into delflation.

“The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc,” the central bank said in a statement.
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“With immediate effect, it will no longer tolerate an exchange rate in the euro against the Swiss franc below the minimum rate of SFr1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”

The SNB added that: “even at a rate of SFr1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.”

The move was a significant departure for the central bank, which in recent weeks has been attempting to rein in the franc by flooding the money market with liquidity and using FX swaps to drive interest rates lower.
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The commitment could expose the SNB to further massive losses. The central bank, which is in part privately owned, lost almost SFr20bn last year after fruitless interventions in the foreign exchange markets in 2010 left it holding massive quantities of euros and dollars, whose value steadily declined in Swiss franc terms.

Although the SNB abandoned its intervention strategy in July 2010, the bank suffered further losses of about SFr10bn in the first half of this year as its foreign currency holdings further declined in value against the surging franc.

Many predicted that the market would test the central bank’s resolve, given that a major source of the strength of the franc – concerns over eurozone government debt – were beyond its control.

Lena Komileva, a strategist at Brown Brothers Harriman, said the move marked a shift in the SNB’s strategy to weaken the franc from a covert psychological war with the market to open arm-wrestling.

“Since the euro remains in a vortex of deteriorating structural, cyclical and financial systemic risks, the incentives for the market are now aligned one-way to sell the euro at the overvalued level set by the SNB,” she said.

“This will leave the SNB intervening in the market on a continuous daily basis to protect the peg, with volatile and disorderly euro capital markets only diminishing the SNB’s psychological threat.”

Analysts said the SNB’s intervention could prompt retaliatory action from other central banks, potentially prompting Tokyo to launch a fresh attempt to weaken the yen, which like the franc has been driven to record levels as investors have sought a haven from market turmoil.

“The announcement now raises the potential risk that other central banks will also make surprise announcements to deal with this new round of risk aversion,” said Divyang Shah, analyst at IFR Markets.

Separately, one of Switzerland’s leading economic forecasters warned on Tuesday the economy was on the brink of a recession because of the strong currency and weakening world economy.

BAK Basel cut its forecast for Swiss economic growth next year to just 0.8 per cent, less than half the 1.9 per cent estimated for this year.

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"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Switzerland is an export country. We produce considerably more goods than we consume ourselves, and consequently without exports, our unemployment rate will grow fast. It is currently very low (below 3%).

With the high value of the Swiss Franc, our export industries started suffering, because our products became too expensive on the world markets. Thus, there is a true risk of rising unemployment together with deflationary tendencies.

For this reason, our national bank (SNB) decided to intervene. They will now print as much Swiss currency as it takes and buy Euro with it to ensure that the exchange rate between the Swiss Franc and the Euro will stay at least at a level of EUR 1 = CHF 1.20.

This is not the same thing as joining the Euro. The Swiss Franc will continue to exist, and the SNB can decide at any moment to change its policies again. Yet, the decision is not without consequences.

First, Switzerland has had a considerably lower interest level than the Euro countries in recent years. Evidently if the Swiss Franc is pegged to the Euro, Switzerland will have to raise the interest on bonds traded in Swiss Francs to the European level. This will also raise all other interests, such as the lending rate, and together with the new flood of Swiss Francs, will increase our inflation rate, which currently is one of the lowest in Western countries.

With the higher lending rate, our local building industry will slow down, which is not necessarily a bad thing. In many countries, a rising lending rate would lead to people defaulting on their mortgage payments, but this is less of a problem in Switzerland.

I principally support the decision of the SNB. It is not necessarily a good thing ... but it is the smaller of two evils.

Originally Posted by Francois Cellier

Switzerland is an export country. We produce considerably more goods than we consume ourselves, and consequently without exports, our unemployment rate will grow fast.

True in recent years but don't forget that what usually saw you through was the sale of services, notably financial services (and to a lesser degree, tourism, it seems)

Quote:

I principally support the decision of the SNB. It is not necessarily a good thing ... but it is the smaller of two evils.

It's kind of hard to be really against it but what annoys me is that everybody seems to want to have an export-led model. Switzerland, Germany, China, Japan... And the rest of the developed countries are now joining the chorus. "We spent above our means. Let's export more so that we can rebalance our books"... Great. Erm, remind me, who is buying all that stuff we're producing? To whom are we exporting when we are all exporters? Martians?

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Quote:

To whom are we exporting when we are all exporters?

Americans

The buyer of last resort.

F

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Originally Posted by Gilles de Rais

Eerybody seems to want to have an export-led model. Switzerland, Germany, China, Japan... And the rest of the developed countries are now joining the chorus. "We spent above our means. Let's export more so that we can rebalance our books"... Great. Erm, remind me, who is buying all that stuff we're producing? To whom are we exporting when we are all exporters? Martians?

Our financial system isn't stable; has never been. It only works in the mix ... sort of; for a little while.

Bubbles are the result of the instability that is naturally in our financial system. Some market seems to increase in value, and consequently, everyone wants in on the deal. Thus, that particular commodity (or currency) gets more and more expensive. As it does, yet more people want in on the deal ... until the bubble bursts and everyone loses everything that they had gained before and a bit more.

Originally Posted by FredFredson

Americans. The buyer of last resort.

That was the Good Old Days - Until we realise it was a scam (TM).

But not anymore: U.S. July International Trade in Goods and Services (Text) - Bloomberg

"The U.S. Census Bureau (...) announced today that (..) goods and services deficit [was] $44.8 billion, down from $51.6 billion in June, revised".

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Well of course theres always the tried and tested Imperialism solution: invade some country, burn down its infrastructure and export to your newly-created captive market.

Originally Posted by contracycle

Well of course theres always the tried and tested Imperialism solution: invade some country, burn down its infrastructure and export to your newly-created captive market.

It doesn't even have to happen as dramatically and drastically. Let's look at African countries. They started after their independence to "modernize" and build up an export industry ... e.g. based on cocoa or coffee. Their new mono-cultures were much more energy intensive than the agricultural methods they used earlier. Consequently they needed to import crude oil for their new agricultural production.

Then came the oil crises of 1973 and 1979. Suddenly the crude oil became much more expensive, and these countries needed to invest a large percentage of their export profit into importing oil. Then in the year 2000, the price for cocoa and coffee broke down. These commodities suddenly cost less than 50% of their former price on the world markets. Many farmers lost their harvest, because they were forced to sell for less than it cost them to produce.

A lot of these countries went bankrupt and needed the help of the IMF and the World Bank to recover. They did receive help, but under strict economic conditions. One condition that was imposed almost always was that these countries now needed to drop all import tax barriers. Thus, the local chicken industry could no longer compete against (subsidized) chicken imported from Europe (which made people sick, because the refrigeration chain was broken several times in transport). The local corn industry could not compete against corn from the U.S., which was produced in a much more highly automated fashion, i.e., in spite of the much higher labor cost in the U.S. and the longer transport routes, the local producers couldn't compete with the (subsidized) U.S. corn imports, because in the U.S., the corn could be produced with 1/1000 of the manual labor.

... oh and by the way, one additional condition of the IMF and the World Bank was that the local governments were forbidden to subsidize their farmers.