FX MONETARY POLICies
unstoppable appreciation of the Swiss franc, had to revert to simple verbal intervention: “the bank will act in a decisive manner if needed” (i.e. if economic growth slows and/or deflation sets it) being a typical line.
Chart 2. EUR/CHF slowed down descent in intervention time. experiment wanted to hold.
Life got far more difficult for the SNB and currency levels started to be what worried them more
than
the QE effectiveness itself. Despite intervention volumes getting bigger, they had to leave more and more ground to the advance of market forces. Tey defended 1.46 for a while, then 1.43. A latest desperate battle was fought in May 2010, defending 1.40. On May 19th only 17 billion Euros were bough allowing a push above 1.45. But that was just a brief and last success. By the first week of June, 1.40 was broken and never regained: the SNB had to acknowledge that the forces it was battling against were too large to be contained. In less than 15 months of intervention activity their foreign exchange reserves were grown from less than 50 billion dollars to almost 200 billions. To put the figures in perspective, there have been only two months when China, the world’s largest holder of FX reserves with more than 2 trillion dollars in assets, saw its reserves increase more. Te SNB now claims the world’s 7th largest foreign exchange reserves,
ahead of the perennial interveners of Brazil and of Hong Kong with his peg against the dollar.
For several months Swiss central bankers, with the added burden of massive foreign exchange losses growing by the day under the
Tey could only be passive witnesses of a bull run destined to become parabolic with the EUR/CHF accelerating below 1.20 in June this year, to reach an astonishing 1.0070 on August 9th. Te following rebound (almost touching 1.20 again) was due, with overstretched CHF longs in the short-term market. SNB also helped, starting to be an active actor again with new monetary measures: with three successive massive liquidity injections (the last on August 18th) they upped sight deposits available to
if global growth slows down below stall speed, risks of a currency war will raise
24 FX TRADER MAGAZINE October - December 2011
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