DJ Forex Focus
Swiss Intervention Is Less Likely Now. By Nicholas Hastings
Other central banks may be gearing up to start intervening in currency markets but the Swiss National Bank is probably gearing down.
The Swiss franc is rising back to CHF1.51 level against the euro that would have triggered SNB market action only a matter of weeks ago.
However, all that has changed and the central bank is likely to be much more tolerant of Swiss franc strength now.
Stephen Hull, co-head of global foreign exchange strategy at Morgan Stanley in London, summed it up: "We think that the [intervention] policy will effectively be abandoned soon as it's no longer necessary."
The SNB launched the policy earlier this year as its own unique form of quantitative easing, as central banks around the world tried to pour as much liquidity as they could into their financial markets to prevent a collapse as credit conditions tightened.
In the SNB's case, the impact of the intervention, in which the bank sold the franc and bought dollars and euros, was two-fold.
Liquidity levels were increased as the bank left the franc sales unsterilized--boosting the country's money supply due to a lack of corresponding bond sales--and the franc itself was weakened, reducing the threat the strong currency was posing to Swiss exporters and the country's economic recovery as a whole.
Although never confirmed by the central bank itself, the first exercise was launched back in March with great effect, pushing the euro all the back up to nearly CHF1.54 from levels close to CHF1.46. The bank is believed to have repeated the exercise twice since then as the euro fell under CHF1.51. However, the results have been more modest.
Click Image to Enlarge
In fact, the latest foreign currency reserve figures for the SNB showed a rise of only 0.4% in the third quarter compared with a 46% surge in the second quarter.
Recent economic data shows why the need for intervention has become less urgent.
Not only has Swiss growth picked up again, with the Swiss purchasing managers' index for manufacturers outperforming those of many of its competitors, but deflation risks have capitulated and the Swiss economy looks as if it is now headed for a V-shaped recovery, Morgan Stanley's Hull predicted.
Thus, like other central banks that are starting to look at exit strategies from the emergency monetary programs adopted earlier this year, the SNB is probably now less concerned about the rise in the franc and less likely to intervene.
There is little reason to expect the franc to fall back of its own accord, though.
When the financial crisis was raging, the franc was bought because of its safe-haven status. Now, as the financial crisis subsides and economic growth resumes, the franc could prove just as popular because of the recovery in the Swiss economy.
But, as Hull suggests, fair value for the franc against the euro is probably now down around 1.45--leaving plenty of room for the single currency to fall before franc strength becomes an issue.
Early Monday in Europe, the dollar is being knocked by a report in a Chinese newspaper that the People's Bank of China should consider moving more of its currency reserves out of the dollar and into the euro and yen.
An upturn in stock prices in Asia, with the Nikkei rising 0.8%, was also playing into the hands of the euro, which was higher across the board.
European Central Bank governing-council member Christian Noyer also helped the single currency, by refusing to comment when asked about the euro's recent strength. Noyer's silence helped to reduce fears that the bank will engage in verbal intervention to stop the euro's rise.
By 0745 GMT, the dollar had fallen to CHF1.0072 from CHF1.0094 late on Friday in New York. The euro was flat at CHF1.5138 compared with CHF1.5139.
The euro rose to $1.5023 from $1.4998 and to Y138.14 from Y138.04.
The dollar was also down at Y91.89 from Y92.07.
The Swiss franc is rising back to CHF1.51 level against the euro that would have triggered SNB market action only a matter of weeks ago.
However, all that has changed and the central bank is likely to be much more tolerant of Swiss franc strength now.
Stephen Hull, co-head of global foreign exchange strategy at Morgan Stanley in London, summed it up: "We think that the [intervention] policy will effectively be abandoned soon as it's no longer necessary."
The SNB launched the policy earlier this year as its own unique form of quantitative easing, as central banks around the world tried to pour as much liquidity as they could into their financial markets to prevent a collapse as credit conditions tightened.
In the SNB's case, the impact of the intervention, in which the bank sold the franc and bought dollars and euros, was two-fold.
Liquidity levels were increased as the bank left the franc sales unsterilized--boosting the country's money supply due to a lack of corresponding bond sales--and the franc itself was weakened, reducing the threat the strong currency was posing to Swiss exporters and the country's economic recovery as a whole.
Although never confirmed by the central bank itself, the first exercise was launched back in March with great effect, pushing the euro all the back up to nearly CHF1.54 from levels close to CHF1.46. The bank is believed to have repeated the exercise twice since then as the euro fell under CHF1.51. However, the results have been more modest.
Click Image to Enlarge
In fact, the latest foreign currency reserve figures for the SNB showed a rise of only 0.4% in the third quarter compared with a 46% surge in the second quarter.
Recent economic data shows why the need for intervention has become less urgent.
Not only has Swiss growth picked up again, with the Swiss purchasing managers' index for manufacturers outperforming those of many of its competitors, but deflation risks have capitulated and the Swiss economy looks as if it is now headed for a V-shaped recovery, Morgan Stanley's Hull predicted.
Thus, like other central banks that are starting to look at exit strategies from the emergency monetary programs adopted earlier this year, the SNB is probably now less concerned about the rise in the franc and less likely to intervene.
There is little reason to expect the franc to fall back of its own accord, though.
When the financial crisis was raging, the franc was bought because of its safe-haven status. Now, as the financial crisis subsides and economic growth resumes, the franc could prove just as popular because of the recovery in the Swiss economy.
But, as Hull suggests, fair value for the franc against the euro is probably now down around 1.45--leaving plenty of room for the single currency to fall before franc strength becomes an issue.
Early Monday in Europe, the dollar is being knocked by a report in a Chinese newspaper that the People's Bank of China should consider moving more of its currency reserves out of the dollar and into the euro and yen.
An upturn in stock prices in Asia, with the Nikkei rising 0.8%, was also playing into the hands of the euro, which was higher across the board.
European Central Bank governing-council member Christian Noyer also helped the single currency, by refusing to comment when asked about the euro's recent strength. Noyer's silence helped to reduce fears that the bank will engage in verbal intervention to stop the euro's rise.
By 0745 GMT, the dollar had fallen to CHF1.0072 from CHF1.0094 late on Friday in New York. The euro was flat at CHF1.5138 compared with CHF1.5139.
The euro rose to $1.5023 from $1.4998 and to Y138.14 from Y138.04.
The dollar was also down at Y91.89 from Y92.07.
26 October | 
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