EUR/CHF, A History of Interventions: What markets say, June 2012

Today’s reserve data showed skyrocketing reserves at the Swiss National Bank as they defend the EUR/CHF floor.

Reserves were at 365B francs at the end of Q2 compared to 245B at the end of March, with all the growth coming in the final two months of the quarter as the crisis intensified.

The funds went disproportionately into euros, which now comprise 60% of reserves compared to 50% at the end of Q1. In order to bring the ratio down to 50%, the SNB would have to sell about 37 billion euros. Most of that would go into USD with the remainder into JPY, CAD and AUD (the SNB is seemingly shunning GBP).

The SNB might have begun selling euros at the beginning of the month as EUR/USD fell to the current level from 1.2650. If they haven’t, they are in a difficult position.

Dumping euros now would help knock EUR/USD below 1.2000 and to fresh record lows. That would add to the rout on EUR and (perversely) force them to buy more euros.

In short, the SNB is probably stuck with its euro holdings but may sell them into any euro strength, helping to limit gains.

If the SNB does start to sell, watch two-year German debt and US debt. The SNB is holding a large portion of its euro holdings in the schatz, which fell to a record low -0.09% today. If those yields move up and 2-year T-note yields move down while the euro is sliding, it’s likely the SNB at work.

An explosion 10-pips higher to 1.2021.

Interestingly, EUR/CHF also rallied at the end of last month.

Reserve data released today showed a massive 365B francs at the end of Q2 compared to 245B at the end of March. Nearly all the increase was in euros, which is a surprise because many thought diversification had been adding to euro losses. The SNB increased its share of AUD reserves to 4% but that is still a small number and lower than most expected. The WSJ has more:

So, what is the problem for the SNB?

It now has a reserve structure that leaves it highly exposed to a weak currency that could weaken even further if the euro-zone debt crisis continues to rumble on.

Because of that weakness, the SNB has been unable to pursue its previous policy of diversification out of the euro for fear of driving the single currency even lower.

Yesterday I reported decent buying of 3 month 1.1700 EUR/CHF puts.

Personally I think this is money pissed down a rathole.

I fully expect the 1.2000 peg to be intact in 3 months time.  The proof of the pudding, as they say, is in the eating. We’ll see 

EUR/CHF sits at 1.2006.

As one reader has just said “SNB must be working very hard today.”  Yes indeedy!!

Talk has it that there has been very decent interest to buy 1.1700 EUR/CHF 3 month puts.

Some obviously think the SNB may have to abandon the peg real soon.

• Schneider-Ammann says thankful for SNB for defending cap with all means
• EUR/CHF near 1.20 still above purchasing power parity

A UBS FX managing director makes the case for why the SNB will keep its grip on the franc in the FT.

In May its foreign currency reserves jumped by SFr66bn alone. But this is still “only” 60 per cent of Swiss gross domestic product. Other small, wealthy open economies such as Singapore, Qatar and Abu Dhabi are estimated to have foreign exchange reserves two to three times the size of their economies. Thus the SNB’s balance sheet so far has not become extreme.

His argument sounds contrived to me. And I have to believe that railing against the peg or saying it will fail is a career-limiting move at UBS or Credit Suisse.

There is chatter today about the SNB selling euros to buy dollars and pounds.

How confident are you about the EUR/CHF peg? My confidence in it is near an all-time low.

The SNB’s position: That’s big. Reserves rose to 365 bln  francs from 305 bln in May. That’s about 65% of GDP!

What could possibly go wrong?

Momma always told me not to bet the ranch. The SNB has bet the Alps.

• Franc gains weren’t manageable for Swiss economy
• Franc appreciation has been ‘significant’
• Franc cap is necessity for Swiss economy
• Don’t need extra instruments at the moment, only needed if things get worse
• Foreign exchange interventions can be unlimited
• Negative rates one measure that could be used

As you were.  Sounds like the Swiss authorities are content to support the EUR/CHF 1.2000 peg for the foreseeable future.  The cross trades  at a steady 1.2010.

• Franc ceiling is ‘absolutely necessary’
• Capital controls would be used in ‘extreme situation’
• Cap could be maintained for ‘rather long-time’
• Exit talk is ‘totally premature’

Comments made in interview with Swiss newspaper Le Temps and reported by Bloomberg.

• SNB prepared to buy fx in unlimited quantities
• SNB will continue to aim for 3-month libor at 0-0.25
• SNB sees 2012 inflation at -0.5% (prev forecast was -0.6%)
• Sees 2013 inflation at +0.3% (unchanged from prev forecast)
• Sees 2014 inflation at +0.6% (unchanged from prev forecast)
• Sees 2012 growth at some +1.5% (prev forecast was close to 1%)
• SNB says franc is still high. Another appreciation in franc would have serious impact on both prices and the economy in Switzerland
• SNB ready to take further measures at any time if necessary
• Uncertainty about future developments in the euro area has again risen
• If global activity proves disappointing, downside risks will again emerge for the economy and price stability in Switzerland
• The imbalances in the Swiss residential morgage and real estate markets increased further last quarter
• SNB does not see inflation approaching 2% price stability threshold for entire forecast horizon

No fireworks there. All pretty much as expected.  EUR/CHF steady at 1.2010.

As you were……..

Reuters headline: “SNB chief opposed franc/euro peg in 1999 article”.

In an academic article, he wrote a peg would” prompt more speculation and a concomitant rise in capital inflows into Switzerland…”

Smart guy. That’s exactly what has happened…

Woes, to the extent that the strong franc impairs the Swiss economy…

Generally speaking when we have rising tensions between a former super-power (Russia) and a present super power (the US) , the franc benefits, given traditional Swiss neutrality.

Russia is clearly taking advantage of the perceived weakness of the present White House occupant by sending helicopter gunships to Syria amidst the government crackdown in that strategic  locale in contravention of UN sanctions.

EUR/CHF holds above 1.2000 with plenty of help from the SNB, protecting the 1.2000 peg and literally billions of stop-loss sell orders in the 1.1985/95 area.

Don’t criticize the 1.20 Swiss franc cap, FinMin Schneider-Amman says. That will invite evil speculators…

The peg is absolutely essential to protect the Swiss economy, the minister says.

Speculators, he should know, are short Swiss francs, hoping that the SNB has their backs. Flight capital from places like Greece are what is pushing the Franc to test the cap, not specs…

There are literally 10s of billions of euros of stop-losses in EUR/CHF below the 1.2000 level. Look for fireworks should the Greek elections not produce a euro-friendly government.

…but EUR/CHF is below 1.2010.

DJ reports that Saxobank has doubled margins on certain trades ahead of the SNB meeting Thursday. Using my powers as a super-genius, I assume EUR/CHF must be one of the pairs with higher margin requirements, which is likely putting some pressure on the pair as retail liquidates.

We trade now at 1.20085.

• Swiss industry, tourism struggling with franc

Comments from the Swiss government on the crisis response said they’re still evaluating options on how to deal with the European crisis. They said the cap is the most important tool do deal weaken the franc.

No details on what options they are evaluating but I suspect ‘hope’ and ‘prayer’ are the other options after ‘printing obscene amounts of francs to support the peg.’

Nothing happening in EUR/CHF, at 1.2010.