Whats been happening with the Swiss Franc?
Apr 11th 2012, 8:04 am
#1
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Joined: Mar 2012
Posts: 142
Whats been happening with the Swiss Franc?
A month ago investors were flushed with enthusiasm for the painless (except to the bond-holders who lost three quarters of their money) resolution of the first Greek sovereign default. Every participant had had months to prepare and provision for the event. It would be an exaggeration to characterise the mood as euphoric but expectations had been carefully managed and there was a real sense of relief that an endlessly tedious exercise had come to an end.
Investors sold the Swiss franc as a result. Euroland had not imploded and nobody had died. The need for a safe haven had dwindled and the franc faded by nearly a cent against the euro. The high spirits lasted for, oh, a couple of days. Then the reality set in and the franc returned to its earlier position somewhere near SFr1.2050 to the euro.
And that is where it spent the following three weeks. After all, the Swiss National Bank had said back in September that it would not tolerate a EUR/CHR exchange rate below 1.20. The SNB would spend as many francs as necessary to prevent its currency being pushed higher by speculators hiding from the euro.
It was not an idle threat. A sovereign central bank can, in principle, sell as much of its own currency as it is prepared to print. Often that can result in inflation but that this the least of the SNB's problems at the moment. Swiss inflation is negative, and has been for a couple of months. Although the consumer price index went up by 0.6% in March itself, it went down by -1.0% in the year to March.
It will not therefore have taken too much head-scratching for the SNB to step in during the Easter weekend to hold down the franc when EUR/CHF breached the 1.20 floor. What it must face up to now is that it will probably have to do more of the same.
Investors' faith in the euro is fading again and they would rather hold francs (or, to a lesser extent, sterling). It's the same old problem; contagion. The latest worry is that Spain might be following Greece and Portugal down the road to perdition. Spain spends 57% of its budget on pensions, benefits and interest. Unemployment is rising, tax revenues are falling and more public sector workers are being pushed into retirement. It is not a pretty economic picture.
In theory there is no problem. The EU has boosted its bailout funds to somewhere between €800bn and €1tr (assessments vary) and EU leaders have promised that investors will never again suffer the caning they took with Greek debt. But investors are not convinced. The European Central Bank will not repeat its cheap loans to euro area banks and investors have demonstrated that without that cheap money they do not care to buy Club Med government bonds. Spain struggled to sell its minimum €3.5bn bonds at auction just before Easter.
The near-failure of that bond auction reminded investors that the franc was a far safer currency than the euro. They flocked to buy francs, pushing EUR/CHF briefly below 1.20 before the SNB stepped in.
There is every chance that the SNB will be able to defend its barrier, especially given the negative inflation in Switzerland. But that does not mean the buyers will back off. Even if the franc is not permitted to strengthen there is minimal prospect of it weakening against the euro.
From a sterling-centric point of view that makes life difficult in more ways than one. The franc is glued to the euro and the pound is close to its highest level against the euro since January. It is only two and a half cents shy of its best level since November 2008. An upward break is possible but it is easier to imagine a retreat to the range that has kept the sterling/franc exchange rate mainly between 1.42 and 1.48 since November. It would be tempting to rule out the possibility of sterling falling below 1.42 but that would be rash beyond belief.
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Investors sold the Swiss franc as a result. Euroland had not imploded and nobody had died. The need for a safe haven had dwindled and the franc faded by nearly a cent against the euro. The high spirits lasted for, oh, a couple of days. Then the reality set in and the franc returned to its earlier position somewhere near SFr1.2050 to the euro.
And that is where it spent the following three weeks. After all, the Swiss National Bank had said back in September that it would not tolerate a EUR/CHR exchange rate below 1.20. The SNB would spend as many francs as necessary to prevent its currency being pushed higher by speculators hiding from the euro.
It was not an idle threat. A sovereign central bank can, in principle, sell as much of its own currency as it is prepared to print. Often that can result in inflation but that this the least of the SNB's problems at the moment. Swiss inflation is negative, and has been for a couple of months. Although the consumer price index went up by 0.6% in March itself, it went down by -1.0% in the year to March.
It will not therefore have taken too much head-scratching for the SNB to step in during the Easter weekend to hold down the franc when EUR/CHF breached the 1.20 floor. What it must face up to now is that it will probably have to do more of the same.
Investors' faith in the euro is fading again and they would rather hold francs (or, to a lesser extent, sterling). It's the same old problem; contagion. The latest worry is that Spain might be following Greece and Portugal down the road to perdition. Spain spends 57% of its budget on pensions, benefits and interest. Unemployment is rising, tax revenues are falling and more public sector workers are being pushed into retirement. It is not a pretty economic picture.
In theory there is no problem. The EU has boosted its bailout funds to somewhere between €800bn and €1tr (assessments vary) and EU leaders have promised that investors will never again suffer the caning they took with Greek debt. But investors are not convinced. The European Central Bank will not repeat its cheap loans to euro area banks and investors have demonstrated that without that cheap money they do not care to buy Club Med government bonds. Spain struggled to sell its minimum €3.5bn bonds at auction just before Easter.
The near-failure of that bond auction reminded investors that the franc was a far safer currency than the euro. They flocked to buy francs, pushing EUR/CHF briefly below 1.20 before the SNB stepped in.
There is every chance that the SNB will be able to defend its barrier, especially given the negative inflation in Switzerland. But that does not mean the buyers will back off. Even if the franc is not permitted to strengthen there is minimal prospect of it weakening against the euro.
From a sterling-centric point of view that makes life difficult in more ways than one. The franc is glued to the euro and the pound is close to its highest level against the euro since January. It is only two and a half cents shy of its best level since November 2008. An upward break is possible but it is easier to imagine a retreat to the range that has kept the sterling/franc exchange rate mainly between 1.42 and 1.48 since November. It would be tempting to rule out the possibility of sterling falling below 1.42 but that would be rash beyond belief.
If you would like more information please contact me directly or check out our BE currency page
May 14th 2012, 3:42 pm
#2
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Joined: Mar 2012
Posts: 142
Re: Whats been happening with the Swiss Franc?
It was eight months ago that the Swiss National Bank nailed its colours to the mast with an ultimatum that the franc must remain weaker than SFr1.20 to the euro, or else. The franc, which had been trading at SFr1.10 to the euro at the time, promptly retreated. EUR/CHF has remained above 1.20 since then (with one exception just before Easter, which was probably a fluke). In the last couple of months it has hovered around 1.2010, on the right side of the SNB's line in the sand. If the SNB has had to intervene to hold down its currency that intervention has not been obvious. The Bank's foreign reserves have declined in recent months: If intervention had been going on, foreign reserves would logically have increased as a result of the SNB selling francs.
The effect has been to make the franc a Mini-Me of the euro. As nearly as makes no difference they move in perfect step. In the last two months the euro has fallen by 3.5% against the pound; over the same period the franc has fallen by 3.3%. Where the euro goes, the Swiss franc follows.
The reasons for the euro's retreat are well documented; nervousness about Club Med countries in general and Greece in particular. Unfortunately, the symptoms are becoming more, not less pronounced.
Spain has had to carry out a partial nationalisation of the Bankia bank, whose bad loans came close to wiping out its capital. So far, so bad, but Bankia is not the only Spanish financial institution loaded to the gills with dubious loans - many of them to builders and property developers. The government had to chip in €4.5bn to Bankia, the other banks will together need multiples of that amount to keep them afloat. Analysts' estimates vary wildly but they are all talking big numbers; €50bn is the most modest guess.
This would be a problem for the Spanish authorities. They don't have the cash and, with half the country on the dole, they don't have a prayer of raising it through taxation. Borrowing would be an option, were it not that in the last few months the only buyers of Spanish government bonds have been the very domestic banks in need of recapitalisation. Repeated denials from Madrid and Brussels that Spain will need a bailout make it likely that a bailout for Spain is being prepared in Brussels and Madrid.
A more immediate problem for the euro is the interregnum in Athens, where a general election gave parliamentary seats to all sorts of new anti-austerity political parties. The biggest, Syriza, will not participate in any coalition that refuses to repudiate the "barbaric" terms of what it sees as fruitless German-imposed austerity. If a re-run of the election is called, as is likely, the opinion polls suggest Syriza will emerge with the most seats.
Conceivably, the EU's desire to keep the euro intact might be enough to encourage Chancellor Merkel and others to allow a renegotiation of the Greek bailout terms. But nobody is banking on that. The official line is that if Greece refuses to toe the austerity line the money stops. And if the money stops, Greece defaults on its debts and can no longer (it is assumed) remain in the euro. There is a genuine anxiety that the entire single currency could go for a ball of chalk if Greece's departure were to prompt a withdrawal of capital from Ireland, Spain, Portugal and any other country that might decide to go its own way.
All of these pressures have cast into doubt the determination of the Swiss National Bank to remain aboard the foundering ship that is the euro. Granted, the Swiss authorities are keen to return their currency to a more competitive international level, but will they cling to the wreckage even as it sinks? There is every expectation that they will. After all, Swiss retail prices are falling at the rate of -1.0% a year. That is deflation, a most unpopular thing with central bankers and governments.
A statement on the matter is expected in the near future from the newly-confirmed SNB President Thomas Jordan. Most analysts reckon he will stick to the EUR/CHF 1.20 floor and that the franc will continue to shadow the euro. Logically that ought to mean further gains for sterling against the franc.
If you would like more information please contact me directly or check out our BE currency page
The effect has been to make the franc a Mini-Me of the euro. As nearly as makes no difference they move in perfect step. In the last two months the euro has fallen by 3.5% against the pound; over the same period the franc has fallen by 3.3%. Where the euro goes, the Swiss franc follows.
The reasons for the euro's retreat are well documented; nervousness about Club Med countries in general and Greece in particular. Unfortunately, the symptoms are becoming more, not less pronounced.
Spain has had to carry out a partial nationalisation of the Bankia bank, whose bad loans came close to wiping out its capital. So far, so bad, but Bankia is not the only Spanish financial institution loaded to the gills with dubious loans - many of them to builders and property developers. The government had to chip in €4.5bn to Bankia, the other banks will together need multiples of that amount to keep them afloat. Analysts' estimates vary wildly but they are all talking big numbers; €50bn is the most modest guess.
This would be a problem for the Spanish authorities. They don't have the cash and, with half the country on the dole, they don't have a prayer of raising it through taxation. Borrowing would be an option, were it not that in the last few months the only buyers of Spanish government bonds have been the very domestic banks in need of recapitalisation. Repeated denials from Madrid and Brussels that Spain will need a bailout make it likely that a bailout for Spain is being prepared in Brussels and Madrid.
A more immediate problem for the euro is the interregnum in Athens, where a general election gave parliamentary seats to all sorts of new anti-austerity political parties. The biggest, Syriza, will not participate in any coalition that refuses to repudiate the "barbaric" terms of what it sees as fruitless German-imposed austerity. If a re-run of the election is called, as is likely, the opinion polls suggest Syriza will emerge with the most seats.
Conceivably, the EU's desire to keep the euro intact might be enough to encourage Chancellor Merkel and others to allow a renegotiation of the Greek bailout terms. But nobody is banking on that. The official line is that if Greece refuses to toe the austerity line the money stops. And if the money stops, Greece defaults on its debts and can no longer (it is assumed) remain in the euro. There is a genuine anxiety that the entire single currency could go for a ball of chalk if Greece's departure were to prompt a withdrawal of capital from Ireland, Spain, Portugal and any other country that might decide to go its own way.
All of these pressures have cast into doubt the determination of the Swiss National Bank to remain aboard the foundering ship that is the euro. Granted, the Swiss authorities are keen to return their currency to a more competitive international level, but will they cling to the wreckage even as it sinks? There is every expectation that they will. After all, Swiss retail prices are falling at the rate of -1.0% a year. That is deflation, a most unpopular thing with central bankers and governments.
A statement on the matter is expected in the near future from the newly-confirmed SNB President Thomas Jordan. Most analysts reckon he will stick to the EUR/CHF 1.20 floor and that the franc will continue to shadow the euro. Logically that ought to mean further gains for sterling against the franc.
If you would like more information please contact me directly or check out our BE currency page
Jun 15th 2012, 8:23 am
#3
Forum Regular
Thread Starter
Joined: Mar 2012
Posts: 142
Re: Whats been happening with the Swiss Franc?
Except for the occasional expedition beyond its boundaries the franc has remained in a channel between 1.2003 and 1.2013 francs to €1 for more than a month. In late May the euro did spike above SFr1.2060 but within a couple of days it had settled back to its accustomed position.
With the Swiss National Bank defending a self-imposed EUR/CHF floor of 1.20 since September investors have not been eager to test its resolve. Indeed, the spike in late May happened because of fears that the SNB might have more draconian measures up its sleeve - perhaps a tax on non-domestic holders of the franc. Although nothing along those lines has come to light, the market is well aware of the negative weekend interest rate imposed on speculative holders of the franc four decades ago to prevent just such an inflow of hot money.
To an extent, investors are already demonstrating their readiness to live with negative Swiss interest rates. They are not too onerous, just small fractions of a percentage point, but the latest SNB monetary policy data show Swiss Average Rates at -0.003% for one week deposits, -0.049% for one month and -0.122% for three months. Today's investors are less worried about return on capital than return of capital.
Nevertheless, the SNB floor means the franc is still moored to the euro and the euro is still linked to the fate of Greece, Spain, and the rest of peripheral Euroland. The game moved on to a new stage last weekend and it will take another big step during the coming one.
Last Saturday, after a well-flagged period of preparation, the EU agreed to provide Spain with a €100bn bailout to rescue its troubled banks. The words "bailout" and "rescue" were conspicuously absent from the Madrid government's media presentations. The Prime Minister made a brave attempt to put a positive spin on it all with references to "victory" for Spain and "victory" for the euro.
Investors are far from convinced. With exact details of the bailout still uncertain they are reserving their judgment but there are clear concerns. In particular, the worry is that the €100bn from the EU bailout fund could rank ahead of Spanish government bonds issued in the past and in the future. That would make foreign investors even more reluctant to buy them than they already are.
But never mind, the EU acted in time to push Spain onto the back burner in time for the Greek election this Sunday. The opinion polls show that a) Greeks want to stay in the euro, and that b) they are unwilling to pay the price of the austerity economics implicit in doing so. The polls also show the anti-austerity Syriza party and the pro-euro New Democracy neck-and-neck.
The opportunities for disaster on Sunday are clear. A Syriza victory would mean a resolute effort by the incoming government to renegotiate the bailout terms. The EU might or might not play along, but the line from Brussels so far is that continued austerity is a condition of future bailout payments. Another ugly possibility is a repeat of last month's hung parliament, which would raise a whole different set of worries.
So the franc is tied to the euro and the euro is tied to the fate of Greece, Spain, Italy and the rest of them. It is very difficult to see upside for the euro at the moment. Too many things could go wrong and too few things appear to be within reach of a positive solution. Having said that, the franc offers reassuring security to investors. It might suffer in the short term as a result of its peg to the euro but it will still be around in the long run even if the euro crumbles. We do not predict that the euro will crumble but a whole lot of folk out there think it could.
With the Swiss National Bank defending a self-imposed EUR/CHF floor of 1.20 since September investors have not been eager to test its resolve. Indeed, the spike in late May happened because of fears that the SNB might have more draconian measures up its sleeve - perhaps a tax on non-domestic holders of the franc. Although nothing along those lines has come to light, the market is well aware of the negative weekend interest rate imposed on speculative holders of the franc four decades ago to prevent just such an inflow of hot money.
To an extent, investors are already demonstrating their readiness to live with negative Swiss interest rates. They are not too onerous, just small fractions of a percentage point, but the latest SNB monetary policy data show Swiss Average Rates at -0.003% for one week deposits, -0.049% for one month and -0.122% for three months. Today's investors are less worried about return on capital than return of capital.
Nevertheless, the SNB floor means the franc is still moored to the euro and the euro is still linked to the fate of Greece, Spain, and the rest of peripheral Euroland. The game moved on to a new stage last weekend and it will take another big step during the coming one.
Last Saturday, after a well-flagged period of preparation, the EU agreed to provide Spain with a €100bn bailout to rescue its troubled banks. The words "bailout" and "rescue" were conspicuously absent from the Madrid government's media presentations. The Prime Minister made a brave attempt to put a positive spin on it all with references to "victory" for Spain and "victory" for the euro.
Investors are far from convinced. With exact details of the bailout still uncertain they are reserving their judgment but there are clear concerns. In particular, the worry is that the €100bn from the EU bailout fund could rank ahead of Spanish government bonds issued in the past and in the future. That would make foreign investors even more reluctant to buy them than they already are.
But never mind, the EU acted in time to push Spain onto the back burner in time for the Greek election this Sunday. The opinion polls show that a) Greeks want to stay in the euro, and that b) they are unwilling to pay the price of the austerity economics implicit in doing so. The polls also show the anti-austerity Syriza party and the pro-euro New Democracy neck-and-neck.
The opportunities for disaster on Sunday are clear. A Syriza victory would mean a resolute effort by the incoming government to renegotiate the bailout terms. The EU might or might not play along, but the line from Brussels so far is that continued austerity is a condition of future bailout payments. Another ugly possibility is a repeat of last month's hung parliament, which would raise a whole different set of worries.
So the franc is tied to the euro and the euro is tied to the fate of Greece, Spain, Italy and the rest of them. It is very difficult to see upside for the euro at the moment. Too many things could go wrong and too few things appear to be within reach of a positive solution. Having said that, the franc offers reassuring security to investors. It might suffer in the short term as a result of its peg to the euro but it will still be around in the long run even if the euro crumbles. We do not predict that the euro will crumble but a whole lot of folk out there think it could.
