Swiss Try to Take Down The Franc a Peg or Two ; s Switzerland's central bank truly ready to take more drastic steps to cool down the country's currency?
The Swiss franc's two-day slide against the euro and U.S. dollar at the end of last week came amid talk that the Swiss National Bank should temporarily peg the franc to the euro, the currency of its main trading partners. Flooding the market with liquidity, as the central bank announced on Wednesday that it is doing, may not be enough, under that thinking.
Friday, the euro rose to 1.1079 franc, from 1.0829 franc. But it remains a far cry from its level at the end of 2010, when it traded at 1.2507 franc.
The dollar climbed to 0.7779 franc, from 0.7605 franc on Thursday. It stood at 0.9366 franc at the end of last year.
With calls from Swiss exporters and the tourism industry for such a temporary peg growing louder, and even the conservative Swiss People's Party now backing the idea, the political obstacles to such a policy have essentially disappeared.
Until recently, when the Swiss franc rose to near-parity against the euro, a peg had been unthinkable.
The SNB was roundly criticized at home when it stepped into currency markets in 2009 and 2010 in a bid to weaken the franc. Critics said intervention had failed to stem the franc's rise, and resulted in a 21 billion-franc ($27.0 billion) book loss.
But even if the SNB now has more political freedom to act, some analysts say a peg simply isn't practical.
The market would immediately challenge a temporary peg, said said Stephen Jen, founder of London-based SLJ Macro Partners. Nor would it end the demand for safe-haven francs,
"Intervention is one thing, but a peg gives the market something to aim at," he said. "People would build up ... positions in an expectation that the peg will break. Speculators love it when policy makers put a line in the sand that they can't defend."
On a practical level, a peg, would force the SNB to sell francs to keep the exchange rate at the fixed rate. As the SNB's past intervention efforts have shown, doing so is costly, and success isn't guaranteed.
Moreover, central-bank intervention in the currency market generally is more effective if it involves more than one central bank, economists say.
This led to speculation Friday that the Swiss National Bank could team up with the European Central Bank, and quietly intervene in currency markets without making their efforts public.
"The ECB as a huge conglomerate of individual central banks is unlikely to go public on any deal with the SNB, but such rumors also act as a deterrent to the market, which is very nervous at the moment," said Thomas Steinemann, currency strategist in Zurich with private bank Vontobel.
Both central banks declined to comment Friday
"Central banks often help each other out, and [SNB President Philipp] Hildebrand is well connected, in addition to which the ECB would probably also like to see some of the volatility in the euro smoothed out," said David Kohl, chief currency strategist at Julius Baer.
"It would be a smart option," he added.
The mere hint by SNB director Thomas Jordan in a Swiss newspaper interview that the central bank doesn't exclude a temporary peg contributed to the franc's slump late last week.
In addition, some hedge funds had reversed their positions over the past week and sold francs in a belief that the currency has peaked, contributing to the currency's fall.
The Swiss National Bank's decision to swamp the market with Swiss francs has also lessened the appeal of holding Swiss francs. The three-month Swiss franc London Interbank Offered Rate, which the central bank targets and can indirectly influence, has turned negative.
Paying for the privilege of holding Swiss francs is certainly rendering this investment less attractive. But it's not clear that this could stop the franc from appreciating again if markets remain in turmoil.
"The recent franc gains have clearly been driven by risk aversion, so the SNB's measures up to now won't stop inflows into the franc in a world that's looking for capital preservation," said Gavin Friend, a strategist in London with National Australia Bank.
The SNB may have to do more, and its policy-setters have said they aren't ruling out any options.
"The situation is extremely complex and difficult," Jean-Pierre Danthine, another member of the central bank's policy-setting board, told Swiss daily Le Temps on Thursday. "This context leads us to say that no measure is excluded. We're evaluating them all and we are ready to act," he said.
The Swiss franc's two-day slide against the euro and U.S. dollar at the end of last week came amid talk that the Swiss National Bank should temporarily peg the franc to the euro, the currency of its main trading partners. Flooding the market with liquidity, as the central bank announced on Wednesday that it is doing, may not be enough, under that thinking.
Friday, the euro rose to 1.1079 franc, from 1.0829 franc. But it remains a far cry from its level at the end of 2010, when it traded at 1.2507 franc.
The dollar climbed to 0.7779 franc, from 0.7605 franc on Thursday. It stood at 0.9366 franc at the end of last year.
With calls from Swiss exporters and the tourism industry for such a temporary peg growing louder, and even the conservative Swiss People's Party now backing the idea, the political obstacles to such a policy have essentially disappeared.
Until recently, when the Swiss franc rose to near-parity against the euro, a peg had been unthinkable.
The SNB was roundly criticized at home when it stepped into currency markets in 2009 and 2010 in a bid to weaken the franc. Critics said intervention had failed to stem the franc's rise, and resulted in a 21 billion-franc ($27.0 billion) book loss.
But even if the SNB now has more political freedom to act, some analysts say a peg simply isn't practical.
The market would immediately challenge a temporary peg, said said Stephen Jen, founder of London-based SLJ Macro Partners. Nor would it end the demand for safe-haven francs,
"Intervention is one thing, but a peg gives the market something to aim at," he said. "People would build up ... positions in an expectation that the peg will break. Speculators love it when policy makers put a line in the sand that they can't defend."
On a practical level, a peg, would force the SNB to sell francs to keep the exchange rate at the fixed rate. As the SNB's past intervention efforts have shown, doing so is costly, and success isn't guaranteed.
Moreover, central-bank intervention in the currency market generally is more effective if it involves more than one central bank, economists say.
This led to speculation Friday that the Swiss National Bank could team up with the European Central Bank, and quietly intervene in currency markets without making their efforts public.
"The ECB as a huge conglomerate of individual central banks is unlikely to go public on any deal with the SNB, but such rumors also act as a deterrent to the market, which is very nervous at the moment," said Thomas Steinemann, currency strategist in Zurich with private bank Vontobel.
Both central banks declined to comment Friday
"Central banks often help each other out, and [SNB President Philipp] Hildebrand is well connected, in addition to which the ECB would probably also like to see some of the volatility in the euro smoothed out," said David Kohl, chief currency strategist at Julius Baer.
"It would be a smart option," he added.
The mere hint by SNB director Thomas Jordan in a Swiss newspaper interview that the central bank doesn't exclude a temporary peg contributed to the franc's slump late last week.
In addition, some hedge funds had reversed their positions over the past week and sold francs in a belief that the currency has peaked, contributing to the currency's fall.
The Swiss National Bank's decision to swamp the market with Swiss francs has also lessened the appeal of holding Swiss francs. The three-month Swiss franc London Interbank Offered Rate, which the central bank targets and can indirectly influence, has turned negative.
Paying for the privilege of holding Swiss francs is certainly rendering this investment less attractive. But it's not clear that this could stop the franc from appreciating again if markets remain in turmoil.
"The recent franc gains have clearly been driven by risk aversion, so the SNB's measures up to now won't stop inflows into the franc in a world that's looking for capital preservation," said Gavin Friend, a strategist in London with National Australia Bank.
The SNB may have to do more, and its policy-setters have said they aren't ruling out any options.
"The situation is extremely complex and difficult," Jean-Pierre Danthine, another member of the central bank's policy-setting board, told Swiss daily Le Temps on Thursday. "This context leads us to say that no measure is excluded. We're evaluating them all and we are ready to act," he said.
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