Five months have now passed since the Swiss National Bank (SNB) announced that it was prepared to defend a minimum exchange rate for the euro of 1.20 Swiss francs using unlimited resources. It was certainly because the market had not expected such a bold commitment from such a conservative central bank that the threat was taken so seriously, After all, the SNB had previously intervened to weaken the Swiss franc, but without success. Yet, who could deny the seriousness of the threat: selling unlimited quantities of its own money is theoretically possible if a central bank has the ability to print them.
So far, the currency traders have not dared test the Bank’s resolve. In contrast to the plight of the Bank of Japan (BoJ), which is also faced with huge capital inflows into its country and has had to deploy vast sums in currency intervention, the SNB has hardly had to do anything at all. The threat alone has sufficed to scare off would-be Swiss franc buyers. Indeed, some currency speculators have been doing the SNB’s job: so convinced are they that the central bank will prevail in its endeavour, they have bought euros versus the franc in the hope that SNB intervention will subsidise their profits. It is not for no reason that rumours have repeatedly circulated in the market that monetary officials plan to raise the ‘floor’ to 1.25, or even to 1.30 – this is precisely the free lunch the speculators seek.
In the last nine weeks the euro has rather conspicuously drifted back to the SNB floor. Although it was obvious from the start that printing unlimited quantities of francs could wreak havoc on the Swiss economy if the SNB ever went through with it, the threat has taken time to lose its credibility. In a sense, the Hildebrand scandal may have contributed to this loss of credibility because the entire policy was based on confidence. [1] One can only hope that when the SNB’s determination is put to the test that it have sufficient aces in its hand because, not only will it have to deal with the pool of investors who have so far been discouraged from moving more of their wealth in Swiss francs, it will also be besieged by a cohort of speculators hastily trying to exit losing trades.
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Tags: BoJ, intervention, SNB