When former Bundesbank President Axel Weber was asked whether he has confidence in Thomas Jordan’s currency policy, he didn’t hesitate.
“As solid and steady as he is as a central banker, so is the Swiss franc,” Weber told an audience of European central bankers at an event on May 16 in Frankfurt. “I wake up in the morning and if somebody asks me where the Swiss franc is, I don’t need to look at any screens. I know where it is.”
The resolve of Swiss National Bank Chairman Jordan to keep the franc from breaching the 1.20 ceiling versus the euro may be further tested as the central bank finds itself engulfed by the euro area’s worsening debt crisis. With Greece’s inconclusive elections increasing investor concern about a breakup of the currency bloc, he said this week that capital controls are among the measures being considered if the turmoil escalates.
The franc traded at 1.2019 versus the euro at 8:06 a.m. today, little changed on the day. It was at 95.92 centimes versus the dollar.
The Swiss currency had previously been the top choice for investors seeking safety from global turmoil, strengthening to near parity with the euro in August before the introduction of the ceiling the following month forced them to look elsewhere.
While the dollar has gained 4.4 percent against the euro and the yen appreciated 4.9 percent since the Greek elections on May 6 catapulted an anti-bailout party into second place, the franc has been little changed. The British pound and Singapore dollar also advanced.
“Average volumes seen in euro-franc trading remain far below last year’s levels,” UBS AG (UBSN) currency analysts, including Geoffrey Yu and Chris Walker in London, wrote in a May 21 note. “This still points to limited conviction among parties with an interest in playing further downside. However, the wider circumstances for euro-franc have changed and a Greek exit from the euro zone would prove a stern test.”
Jordan, 49, who was appointed chairman last month, has indicated he’s ready for any test, saying on April 10 that the SNB’s “trading limits amount to some hundreds of billions of euros a day.” He told the newspaper SonntagsZeitung in an interview published May 27 that the Swiss economy needs “to be prepared for the possibility of the currency union collapsing.”
“One measure would be capital controls, or measures that directly influence the inflow of capital,” he said, without elaborating. “We’re identifying these instruments in case more measures are needed.”
Fifty-seven percent of investors in a Bloomberg Global Poll published on May 10 said at least one country will abandon the euro by year-end. For Weber, who is chairman of UBS, Switzerland’s biggest bank, choosing the “hard way” of staying within the euro region is still the “best way.”
“The euro and any discussion about this not being a one-way arrangement will just lead to another genie-out-of-the-bottle debate,” he told the central bank audience. “When the markets start pricing in that effect, it just produces more repercussions.”
Since the ceiling was introduced on Sept. 6, much of the SNB action has been verbal, with Jordan saying it will enforce the limit with “all means at its disposal” and that it’s ready to buy currencies in “unlimited quantities.”
The SNB doesn’t disclose details of its market operations. At the end of April, currency reserves were 235.6 billion francs ($246 billion), little changed from March. They have more than doubled since the end of 2009, partly because of SNB currency interventions in the 15 months through June 2010.
Ian Stannard, head of European currency strategy at Morgan Stanley (MS) in London, said the SNB will eventually be forced to give up its franc defense as Europe’s crisis worsens, reaffirming the currency’s haven status. He sees it strengthening toward 1.10 per euro later this year.
The ceiling will probably “give away in the third quarter of this year,” he said. “It’s going to be very much the sheer weight of the amount of interventions that would have to be done to maintain it.”
Data show the SNB has been reducing its euro exposure over the past two years. Euro holdings accounted for 51 percent of reserves at the end of the first quarter, down from 70 percent in the second quarter of 2010. Reserves of dollars rose to 28 percent from 22 percent in that period.
Michael Derks, chief strategist at FXPro Financial Services Ltd. in London, said investors are likely to continue shifting out of euros over the coming months.
“With European politicians bereft of coherent ideas on how to resolve the sovereign debt and banking crisis, and with Greece on the verge of being forced out, it’s little wonder that anyone with any exposure to the single currency is doing something about it,” he wrote in an e-mailed note. “For now, fearing the worst for Europe is probably the right call.”
Switzerland sold six-month bills at an average yield of minus 0.32 percent on May 22 and three-month bills at minus 0.2 percent on May 15. Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, said investors “remain concerned about the preservation of their capital, rather than the return on it.”
Jordan, speaking at the same event in Frankfurt as Weber, signaled that the SNB was running out of tools as the franc ascended to a record last year, which threatened export competitiveness and economic growth. The ceiling was “really the only effective option we had at that time available to combat the acute threat,” he said.
With the euro-area turmoil clouding Switzerland’s economic outlook and new Greek elections looming on June 17, Jordan has to remain vigilant, said David Kohl, deputy chief economist at Julius Baer Group Ltd. (BAER) in Frankfurt.
“There’s a general increase in risk aversion,” he said. “It may well happen that some people out there might be tempted to test the SNB’s resolve. It’s a bit like poker -- the SNB may have bad cards, but it has the deepest pockets.”
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