The Swiss central bank may need to ready its “nuclear weapon” of buying euros as the franc heads for the biggest weekly advance on record against Europe’s single currency.
While the Swiss National Bank has so far avoided currency purchases in its latest bid to keep a lid on the franc, it may soon have no alternative but to follow through on its threat to intervene, economists and strategists said.
“The SNB will fire its nuclear weapon and start interventions if the franc reaches parity,” said You-Na Park, a strategist at Commerzbank AG in Frankfurt. “The current franc levels really hurt the economy.”
The SNB, led by Philipp Hildebrand, is under pressure from executives including Swatch Group AG (UHR) Chief Executive Nick Hayek and lawmakers such as Swiss People’s Party Vice President Christoph Blocher to weaken the franc to keep companies from cutting jobs and moving production sites abroad. The currency’s 16 percent ascent against the euro over the past year is hurting exports and raising the risk of an economic recession.
While the franc has weakened against the euro since Aug. 3, when the SNB cut borrowing costs to zero and boosted liquidity to the money market to fight the currency’s appreciation, it has reversed losses over the past three days.
The franc, considered a haven in times of global turmoil, has gained 6.4 percent against the euro since Aug. 30, putting it on track for the biggest weekly gain since the introduction of the single currency in 1999. It was at 1.1133 at 4:46 p.m. in Zurich, up 1.9 percent on the day.
“Pressure on the franc remains as long as the euro area’s fiscal problems drag on,” said Cornelia Luchsinger, an economist at Zuercher Kantonalbank in Zurich. “Should the currency strengthen to 1.10 or less versus the euro, the SNB might feel obliged to intervene.”
The franc reached a record 1.0075 on Aug. 9. Switzerland’s currency is 39 percent overvalued against the euro, based on purchasing power parity as calculated by the Organization for Economic Cooperation and Development.
“The SNB will intervene in times of low trading volumes to have the biggest possible impact,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “That could be Sept. 5, as it’s a holiday in the U.S.” and markets are closed.
The Zurich-based SNB in June 2010 abandoned 15 months of intervention efforts after quadrupling its currency holdings. The policy led to a record loss of $21 billion last year and sparked lawmaker calls for Hildebrand to resign.
Since then, politicians have called on the SNB to step up efforts. The Swiss government pledged on Aug. 31 to spend 870 million francs ($1.1 billion) on an economic stimulus package to help counter the impact of the franc’s strength.
At a meeting in Bern today, the government and leaders of all five ruling-coalition parties welcomed the SNB’s measures to weaken the franc, according to an e-mailed statement. Economy Minister Johann Schneider-Ammann informed participants about the economic situation and called the exchange rate volatile.
For its part, the SNB has refrained from stepping up efforts after boosting liquidity over three consecutive weeks. Vice President Thomas Jordan has said the bank is assessing “a whole range of options” to weaken the franc and remains ready to act if needed.
A slump in exports and company spending sparked an economic slowdown in the second quarter, with gross domestic product rising 0.4 percent, down from 0.6 percent in the previous three months. That’s the worst performance since the economy emerged from a recession in 2009. Foreign sales account for about half of Swiss GDP.
ABB Ltd. (ABBN), the world’s largest maker of power-transmission gear, has called the strong franc a “headache” and responded by buying more parts from euro-region suppliers to feed its Swiss factories. Holcim Ltd. (HOLN), the world’s second-biggest cement maker, said on Aug. 18 currency effects shaved 203 million francs off operating profit in the second quarter.
“If the franc appreciates and remains at parity for a while, a severe recession would be inevitable,” said Alexander Koch, an economist at UniCredit Group in Munich. “They can’t let this happen because once you decide to move a plant to the euro zone, it’s unlikely that it will ever come back.”
Geoffrey Yu, a foreign-exchange strategist at UBS AG in London, said the SNB may consider setting a floor of 1.10 or 1.15 against the euro. While some economists expect SNB council members to take additional measures when they meet for their quarterly assessment on Sept. 15, Geoff Kendrick, head of European currency strategy at Nomura International Plc in London, disagrees.
“I don’t expect the SNB to come in,” he said. “Their optimal strategy is to keep talking. That works quite nicely for them.”
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