Swiss central bank battles to halt franc’s rise
‘Massively overvalued’ franc hurts economy, SNB says; euro surges
The euro /quotes/zigman/4868091/sampled EURCHF +2.28% , which had earlier notched a fresh all-time low versus the Swiss unit below 1.08 francs, rebounded sharply and traded at CHF1.1132 in recent action, a gain of 2.5% from Tuesday.
The U.S. dollar /quotes/zigman/4868123/sampled USDCHF +1.36% rose 1.5% to trade at 77.65 centimes. The U.S. unit had earlier sank to an all-time low versus the safe-haven franc as relief over an agreement to raise the U.S. government’s debt ceiling gave way to worries over weak growth.
There are 100 centimes in a franc.
In a statement, the Swiss National Bank said the currency is “massively overvalued at present” and that its strength “is threatening the development of the economy and increasing the downside risks to price stability in Switzerland.”
The bank also left open the threat of outright intervention in the currency markets, saying it was keeping “a close watch on developments on the foreign-exchange market and will take further measures against the strength of the Swiss franc if necessary.”
Thorsten Polleit, an economist at Barclays Capital, said the SNB’s decision to boost its monetary base — the sight deposits banks hold with the central bank — from around CHF 30 billion ($39 billion) to CHF 80 billion — is effectively a form of quantitative easing.
The moves “are clearly driven by the negative consequences for the Swiss economy and the financial sector of an environment of sagging worldwide growth, accompanied by the Swiss franc exchange rate having climbed to record highs [versus] major currencies,” Polleit said.
But strategists expressed doubt the central bank will be able to stem the franc’s rise as the euro-zone’s debt crisis threatens Spain and Italy and concerns grow over the fragility of the U.S. economic recovery.
“The SNB will be well aware that it is swimming against the tide and that without a solution to the euro-zone sovereign debt crisis it will be difficult to convince investors to dump the franc,” said Jane Foley, senior currency strategist at Rabobank in London.
“This is the primary reason that the SNB has chosen to reduce its three-month Libor target rather than to intervene in the FX market,” she said, noting that the SNB saw its balance sheet hit hard by previous interventions in 2009 and 2010.
Peter A. Rosenstreich, chief foreign-exchange analyst at Swissquote Bank in Geneva, said the SNB’s verbal intervention will be “mildly effective” in the short term, but that the impact is likely to soon wear off.
The decision to target the three-month rate as close to zero as possible “is merely for show,” Rosenstreich said, “since traders are not in the Swiss franc for the interest-rate differential” with other currencies. With rates already near zero, the move will do little to impede safe-haven flows into the franc.
Meanwhile, Steen Jakobsen, chief economist at Saxo Bank, said the SNB move helped prompt him to move from a “risk off” to “neutral” stance on market strategy.
“The move by the SNB today to move towards QE is a clear warning signal to me that the policy risk has become too big for global policymakers,” indicating a policy response to slowing growth from the Group of 20 nations may be imminent, he said, in emailed comments.