The SNB and the Russia/oil connection

by
Izabella Kaminska
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A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.

Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:

Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.

Since this measure wasn’t enough to put the flows off, it was clear, Derrick notes, something else would have to be done.

So what does today’s move tell us? According to Derrick, mainly that the SNB probably expected quite an inflow in the weeks to come and was not prepared to provide these buyers of CHF with an artificial cheap rate.

It was not, as you might put it, prepared to bailout the world’s oil/commodity value losses.

This makes a lot of sense if you appreciate that Switzerland is home to the world’s biggest oil trading intermediaries, all of whom generate revenues in dollars, all of whom pay (what little tax they do) in Swiss francs, and most of whom have a mix of US dollar liabilities and Swiss ones.

What’s the easiest way to get the best Swiss rate? Swap your overvalued but diminished supply of dollars into euros, and then recycle them directly into as many Swiss francs as you can, which translates into an effective tax break for your oil focused residents.

Then, of course, there’s the ECB’s expected QE programme.

As we’ve noted before, whether intended to or not, the SNB’s floor mechanism recapitalised eurozone assets just when the Eurozone was most in need of capitalisation.

The process by which this happened, of course, was the open bid for euros in the market. Not only did this support the euro, it amounted to a giant bid for what were at the time extremely toxic Eurozone assets that no-one else was prepared to touch, helping to support their value vis-a-vis non euro-denominated assets.

Now, if we assume that ECB QE is really about to take place, we should not be surprised that from the SNB’s perspective this sends a signal that their time recapitalising the eurozone is over. Those Eurozone assets can now swiftly be handed back into the market, because the ECB will be standing by to support them instead.

If you consider the pressure the Swiss balance sheet may be about to feel from distressed oil-related cash flows internally and it makes even more sense that the SNB might be more concerned about the effects of a strong dollar than about Swiss franc strength. Though on that last point we’re speculating. And the linkages are not at all clear.

About Izabella Kaminska

Izabella Kaminska joined FT Alphaville in October 2008, which was, perhaps, the best time in the world to become a financial blogger. (Added bonus: there was a free breakfast trolly.) Before that she worked as a producer at CNBC, a natural gas reporter at Platts and an associate editor of BP’s internal magazine. She has also worked as a reporter on English language business papers in Poland and Azerbaijan and was a Reuters graduate trainee in 2004. Everything she knows about economics stems from a childhood fascination with ancient economies, specifically the agrarian land reforms of the early Roman republic and the coinage and price stability reforms of late Roman emperors. Her favourite emperor is one Gaius Aurelius Valerius Diocletian. She studied Ancient History at UCL, and has a masters in Journalism from what was then the London College of Printing. And yes, she is also a second-generation West London Pole (who likes mushroom picking, bigos and pierogi).

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