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The win of the pro-bailout parties in the Greek elections was no win for the SNB


The win for the pro-bailout parties in the Greek elections was no win for the Swiss National Bank (SNB), even if the fear of an immediate bank-run and extreme money flows into Switzerland are avoided.  Also the fact that QE3 is not coming in the next weeks did not help the SNB.

“Strangely” the financial markets did not respect that all Swiss political parties had finally reached a consensus to support the SNB and that Oswald Grübel decided to stop complaining about the central bank. Strangely markets did not even care about the latest SNB attempts to bash the Swiss economy and the big banks UBS and Credit Suisse and to down-play future inflation risks.

In the week after the Greek elections the inflows into Switzerland were 16 billion francs. They might be additionally fueled by outflows out of German Bunds. It shows that even hedge funds are too small for such amounts. The inflows come from risk-averse investors that seek the Swiss haven, in the strong believe that in this game only the (central) bank loses.


Many details why the SNB had lost the game in previous interventions and will lose the game against markets again can be found in our regular spreadsheet on the SNB money supply and FX reserves (here also the graph form). In the following spreadsheet we have added the estimations of FX reserves and unrealized losses based on a EUR/CHF rate of 1.10 :

BalSheet SNB June 22

BalSheet SNB June 22


SNB interventions are seven times more expensive than during the financial crisis in 2009

The SNB did Forex interventions during four periods:

  1. Between February 2009 and June 2009 the central bank managed to push the EUR/CHF up from 1.4650 to levels around 1.52. The weekly effort in terms of change of sight deposits (unsterilized money supply) was around 2 billion francs.
  2. Between February 2010 and June 2010 the SNB could not stop the fall of the EUR/CHF from 1.4628 to 1.3942 even if it spent 9 billion francs per week (in terms of sight deposits). After it spent over 60 bln. only in April, the central bank gave up.
  3. From End July to Mid September 2011 the central bank was able to introduce the EUR/CHF 1.20 floor and to push the average EUR/CHF rate up from around 1.13. The weekly average costs in terms of sight deposits were 41 billion francs, but the term was relatively short.
  4. Since May, 11th, 2012 the SNB had to spend an average of 14 billion francs per week  only to maintain the floor at 1.20.

The rise in the weekly change of sight deposits among the four intervention periods show that investors are finally of the opinion that a US recovery and higher US rates will take a lot of time. In 2009, the SNB interventions were relatively cheap, because many people bet on a quick return to US growth. Now the SNB weekly efforts are seven times higher.

Government spending, monetary and fiscal policy support Swiss growth

The worldwide accepted IS-LM model proves that the increased money supply, the government spending multiplier (+2.0% QoQ in Q1/2012) and low taxes and tax incentives will continue to sustain the Swiss output. The austerity and tax hiking policy in  the PIIGS does the complete opposite and suppresses growth. SNB’s money printing, the strong money inflows into Switzerland and the new money for Swiss banks might soon end up in the Swiss housing market, despite the SNB’s desperate attempts to stop it. And most importantly it will lead sooner or later to inflation.

Strong Swiss trade balance but SNB unrealized losses are higher

Weekly inflows of 14 bln. CHF and a break of the floor from 1.2040 in Q1/2012 to 1.10 based on 51% Euro reserves, imply that the weekly unrealized losses for the central bank on the euro positions are about 700 million CHF, a number that strongly outweighs the SNB weekly income in form of interest on FX positions of 4 million CHF (own calculation forthcoming). The monthly unrealized losses will be around 3 billion CHF, higher than the strong trade balance of 2.5 bln. CHF.  It might be a lot cheaper to give the SNB money directly to the “poor” exporters instead to the financial markets.

The solution of the euro crisis in form of euro bonds or similar will only send more money out of German Bunds into Switzerland.  To our views, the SNB has only one chance to get away with the 1.20 floor, namely when the US economy strongly rises, which will then open the door for US rate hikes. Unfortunately,  Swiss “monetary policy is not almighty“, as SNB’s Jean-Pierre Danthine said in a different context. Yes, it can further fuel the Swiss real estate bubble and ease rich Germans panic-buying of Swiss properties but it cannot heal the American economy.



This post appeared in testosteronepit and was referenced in Seeking Alpha on June 25th.

George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.

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