Swiss Franc Breaches Cap Versus Euro Amid Crisis Concern
The Swiss franc breached 1.20 per euro for the first time since the central bank set that rate as a limit after a slide in Spanish bonds raised concern the euro area has yet to contain its debt crisis.
Switzerland’s currency appreciated for a second day as Italian and Portuguese bonds also declined. The Swiss National Bank won’t allow the franc to go below 1.20 against the euro and is ready to buy foreign currencies in “unlimited quantities,” spokesman Walter Meier said. The central bank acted to stem the advance today, according to Credit Suisse Group AG.
The franc appreciated to 1.19995 before trading 0.1 percent stronger at 1.2022 at 2:03 p.m. New York time. It weakened 0.5 percent to 91.97 centimes per dollar.
“It’s been our prediction for a while that the floor won’t hold, not when you have renewed concern about the euro region,” said Hans-Guenter Redeker, head of currency strategy at Morgan Stanley in London. “In the near-term, the SNB may have to intervene to defend their credibility, but whether this policy will continue to work remains to be seen.”
The SNB set its foreign-exchange cap on Sept. 6 to protect exports after investors seeking a haven from the euro-area turmoil drove the currency to a record 1.00749 per euro. Board member Jean-Pierre Danthine said the central bank still regards the franc as “overvalued,” the Tribune de Geneve newspaper reported yesterday.
The breach of the 1.20 level was the result of the absence of a bilateral credit relationships between market participants, according to a spokesman for EBS ICAP, a unit of London-based interdealer broker ICAP Plc. There was no malfunction in the EBS electronic trading platform, he said.
The yield on 10-year Spanish bonds rose a third day to 5.75 percent, while rates on similar-maturity Italian securities increased seven basis points to 5.44 percent. Portuguese yields climbed 19 basis points to 12.24 percent.
The Swiss central bank stepped into the market to buy foreign currencies after the franc strengthened through the 1.20 threshold, according to Credit Suisse.
“The move was driven by renewed Europe-centric bouts of risk aversion and an attack on the floor driven by significant orders by speculators,” said Bernd Berg, a currency strategist at Credit Suisse in Zurich. “As the move drove euro-franc below 1.20 the SNB reconfirmed its credibility by coming into the market and also verbally reconfirming its commitment to the floor. We therefore think the floor will hold.”
The franc strengthened against the euro even after a government report showed Swiss consumer prices fell 1 percent in March from a year earlier, after dropping 0.9 percent in February. It weakened 0.5 percent to 89.55 yen.
The franc has gained 1.1 percent against the euro since Jan. 6, the last day of trading before the resignation of SNB President Philipp Hildebrand, who imposed the cap on the currency. Thomas Jordan, his interim replacement, pledged to defend the limit on March 15, saying the franc remains “very, very strong.”
“Even with Hildebrand gone I still expected the SNB to intervene when the market tested its resolve,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The SNB has protected 1.20 remarkably successfully until this point, and they will use their resources to defend it.”
Danthine said the SNB’s limit has helped the country’s exporters, the Tribune de Geneve newspaper reported. He expects “negative inflation” this year and said the Swiss mortgage market is in a “perilous” state of overheating, according to the report.
The SNB abandoned previous efforts to weaken the franc in June 2010 after quadrupling its currency holdings. The Swiss currency advanced 19 percent against the euro that year, and appreciated another 2.8 percent in 2011.
The SNB doesn’t disclose how much money it spends on defending the cap. The Zurich-based central bank had currency reserves of 237.5 billion francs at the end of March, up from 227.2 billion at the end of the previous month, according to a statement on the bank’s website today.
The SNB will be able to hold the franc from appreciating beyond 1.20 per euro in the near term, said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, citing a survey by the bank. Of the respondents, 75 percent said the central bank will be able to defend the 1.20 floor at least in the next three months.
The franc has gained 3.2 percent in the past year, making it the third-best performer after the New Zealand dollar and the yen, according to Bloomberg Correlation-Weighted Indexes, which track the performance of 10 developed-nation currencies.
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