SNB Intervention Would Now Be Damaging. By Nicholas Hastings

There is a point when currency intervention is more of a liability than an asset.

For the Swiss, that point has now come.

Switzerland no longer needs a weak franc. In fact, recent inflation data suggest more intervention would be damaging.

For the past year or so, the Swiss National Bank's repeated attempts to prevent the euro from falling, first under CHF1.50 and then under CHF1.40, were entirely justified.

See how the euro has been held up against the Swiss franc:


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The Swiss economy, which is widely exposed by trade to the euro zone, was still struggling out of recession and the central bank was keen to ensure that the country's exports remained competitive.

Indications are that the exercise, in which billions of francs were sold in exchange for the euro, was successful.

In the first quarter of this year, Swiss exports grew by a very healthy 4.8% and the economy expanded by 2.2% from the year before. This was even more than the 1.7% growth the market expected.

Last month, the country's manufacturing activity also registered another strong increase, with the purchasing managers' index up at 65.9 from 64.4.

These strong numbers are all very well, proving that Switzerland has weathered the credit crisis storm better than its euro-zone neighbours or even the U.K.

But the flip side to this has been a rise in Swiss inflationary pressure.

Intervention helped to push the country's foreign exchange reserves up to $145 billion in April. Although the SNB has attempted to sterilize the euro purchases, the country's monetary base has still expanded and, as Michael Hart, currency strategist at Citigroup in London, pointed out, Swiss three-month rates have slipped to 11 basis points, well below the 25 basis points set by the SNB itself.

"Unsurprisingly," Hart said, "April consumer price index surged to 1.4% on the year, compared to an SNB target of 0.7% in the second quarter."

"Forecasts further out indicate inflation well above the official 2.0% target under unchanged rates, implying that the SNB is set to tighten monetary conditions in coming quarters. Against this backdrop, the SNB is likely to ease off on foreign exchange interventions eventually, despite its professed aversion against Swiss franc appreciation," Hart added.

In other words, if the SNB doesn't want to suffer from the inflationary consequences of intervention, it should pull back from the market right now, giving room for the euro to continue falling at least to its next target at around CHF1.37.

Certainly, with sovereign debt and European Central Bank concerns still weighing on the euro and with global economic recovery still not entirely convincing, the single currency will more than likely stay under pressure, forcing the SNB to illustrate more tolerance of a strong franc.

Early Thursday in Europe, the euro was up a little at CHF1.4171 by 0645 GMT from CHF1.4139 late Wednesday in New York, according to EBS.

The euro was benefiting from a general improvement in market sentiment after strong U.S. pending house sales data helped to lift stock markets and counteract some of the recent gloom about euro-zone sovereign debtors.

A strong private sector employment survey from ADP later in the day is widely expected to boost forecasts for the latest U.S. non-farm payrolls on Friday, lifting market sentiment even further.

The euro was also getting support from a recent survey suggesting that central banks still plan on buying euros for their foreign exchange reserves along with the dollar.

The euro was also up at Y113.57 from Y112.73 while the dollar rose to Y92.39 from Y92.16. The yen remained under pressure because of political uncertainty ahead of Friday's election of a new Japanese prime minister.