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

The FT reports that Switzerland is ‘new China’ in currencies

Chatter that the SNB was buying 3 billion francs worth of euros per day.

“The picture is one of a central bank that’s not coping with how much money is coming in,” said Kit Juckes, foreign currency analyst at Société Générale.

Analysts also note that other central banks, like Sweden, may have to start setting rates with the SNB in mind.

No country wants a strong currency right now. I wonder if other FX reserve managers may soon take reciprocal action, buying an equal amount of CHF to counter-balance growing Swiss reserves.

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.