MONETARY POLICies
the financial system to 200 billion francs (about one third of Swiss yearly GDP). The 3 months annualized carry on EUR/CHF went from -1.5% to -2.5%: to hold short term balances in Swiss franc was now an investment generating negative interest rates. But, by the first week of September, interest implied in FX forwards were going back where they were before the injections, since in the end domestic banks could invest CHF balances at the SNB at the floor 0.00% (never touched by the central bank) and the arbitrage was slowly correcting the previously negative implied rates.
The SNB was starting again to lose the initiative and after the wild rebound to 1.20, EUR/CHF was again starting to flirt with 1.10. The atomic option of being “prepared to buy foreign currency in unlimited quantities” was the only one left.
SUCCESS IS ALMOST
GUARANTEED FOR NOW. HIGHER RISKS LATER ON.
When a central bank deems necessary to intervene in the FX market to weaken its
own currencies it is
obviously in a much better position than when trying instead to stem the weakening. In this second case selling foreign exchange reserves in the market to support the domestic currency is the only way and reserves are always a finite quantity. If the market have enough ammunitions, the defense will be overcome: the most famous example in history has
FX
SNB President - Philipp Hildebrand
SNB is going to follow its new narrow path, alone. reaction from the rest of the world has not been one of encouragement and support.
probably been the British Pound devaluation in 1992.
To weaken or to avoid strengthening of its own currency
is definitely
easier: in the end it is enough to crank up the printing presses. So in the short term SNB action are credible and success pretty likely. It is not an absolute novelty for them either. In 1978, worried from excessive strength of the franc, they started a similar episode of exchange rate targeting (vs DEM). It lasted for 13 months, managing to weaken CHF by a maximum of 17% from the strongest level (it would be more now
considering 1.01 as bottom of EUR/ CHF), before the SNB could stomach the
inflationary consequences of
currency depreciation no longer and abandoned FX targeting in favour of money supply targeting. It has to be noted that the natural flow into CHF is currently much greater than it was in 1978. Ten Switzerland current account surplus was only 2.4% of GDP versus 14% now. In addition, there is still an uncertain volume of CHF funding trades that could be unwound while this most certainly was not a feature of the 1978 landscape. It is then clear, considering also that SNB has a weaker balance
FX TRADER MAGAZINE October - December 2011 25
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86