Friday, 6 April 2012

Swiss Franc: Will another peg bite the dust ?

When back in September of last year the EUR/CHF was heading towards the 1.1 level, many were expecting some sorts of monetary intervention, under the form of a showering of Swiss francs towards the commercial banks. Since the benchmark interest rate was already at the rock-bottom level 0 - 0.25%, and the minimum reserve requirements for short term debt are already at 2.5%, there was little leeway for "traditional" policy instruments. On the 6th of September the Swiss National Bank (SNB) announced an unprecedented peg against the Euro at the 1.20 yardstick. Within minutes the EUR/CHF reached 1.2180, a spectacular 10% gain, after which it hovered around 1.218 - 1.245 depending on the minor jolts sent by the SNB.

CHF under pressure

In recent months without the intervention of the SNB the Swiss Franc returned to the path of appreciation (warranted by the massive current account surplus, its perceived safe haven status, close to zero inflation rate in the Switzerland, and a global capital flight towards risk-off assets) and is now testing the 1.20 peg rate. 

The question here is if investors will see a Bank of England moment where the currency peg is not breached, or are the reserves of the SNB high enough to fight against people bulking into the CHF trade. From the SNB website:

SNB reserves breakdown
The close to 210 billion CHF (252 billion Eur at the current exchange rate) reserves means that the Bank has enough firepower to fight off the attacks against its peg for a while. Almost half of the currency reserves are in Euro and 26% of them are in USD. My opinion is that the Swiss National Bank has enough resources to defend the currency peg against the Euro at least until the economy of the European Union will be in better shape. Because I may be wrong, and there is significant speculative rewards that case, I am going to enter a short position in EUR/CHF with a stop loss at 1.2081.
SNB foreign currency reserves breakdown Q4 2011

1 comment:

  1. You have the fx rate for the 210b CHF reserves upside down.