Franc Gains as Central Bank Refrains From Currency Target

SNB Toughens Franc Fight
Mixed denomination Swiss franc coins sit on the counter at a currency exchange in Effretikon, near Zurich, Switzerland. Photographer: Gianluca Colla/Bloomberg

The franc strengthened after the Swiss central bank stopped short of announcing a target rate or temporary peg to the euro in its third attempt in as many weeks to drive down the currency.

The Swiss National Bank will boost liquidity to the money market, expanding banks’ sight deposits to 200 billion francs ($253 billion) from 120 billion francs, it said in a statement today. The bank will also continue to buy SNB Bills and use foreign-exchange swap transactions. The franc surged as much as 2.1 percent against the euro before paring gains and trading at 1.1413 at 1:15 p.m. in Zurich.

“There were strong expectations, maybe too much, in terms of interventions or a peg,” said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA in London. “What we’re seeing here is disappointment” and “it’s going to be very difficult for the SNB to stand in the way of the foreign-exchange markets, which will want to push the franc higher,” he said.

The franc reached a record high against the euro on Aug. 9, reflecting investor concern that the region’s fiscal crisis may continue to worsen. While the SNB trimmed borrowing costs to zero on Aug. 3, the currency continued to appreciate, threatening to erode exports and spark a recession. SNB Vice President Thomas Jordan has said policy makers are assessing “a whole range of options,” with a temporary currency peg to the euro among the legal possibilities.

Next Move?

The SNB, led by Philipp Hildebrand, today said that “it will, if necessary, take further measures against the strength of the franc,” without elaborating.

“It remains to be seen what they do next,” said Fabian Heller, an economist at Credit Suisse Group AG in Zurich. “The SNB has other means of action, but for now, they’re just pursuing this liquidity strategy.”

While BNP’s Saywell said on Bloomberg Television today that it’s going to be near impossible for policy makers to peg the franc to the euro and commit to unlimited currency purchases, Janwillem Acket, chief economist at Julius Baer Group Ltd. in Zurich, called a unilateral intervention a “daunting task.”

“It’s only a matter of time to see economic figures in Switzerland turn ugly,” Acket said. “If they go for a peg, they’d have to throw quite a lot of money on the market.”

Swiss Exports

The seven-member Swiss government has also signaled concern that the franc’s ascent may hurt the economy. The currency is on the agenda at today’s weekly cabinet meeting.

The franc, considered a haven in times of turmoil, has strengthened 11 percent this year against the euro. It reached a record 1.0075 on Aug. 9, trading near parity with the single currency. Versus the dollar, the franc has appreciated 19 percent this year to an all-time high of 70.71 centimes on the same day earlier this month.

With exports contributing about half of gross domestic product, Swiss companies including Swatch Group AG, the world’s biggest watchmaker, and chemicals maker Lonza Group AG are under increasing pressure to cut costs to maintain margins. Nestle SA, the world’s largest food company, said on Aug. 10 the franc’s gain hurt first-half sales growth.

‘Not Sufficient’

Goldman Sachs Group Inc. earlier this month cut its Swiss growth forecasts for this year to 1.9 percent from 2.1 percent, and for next year to 0.6 percent from 2 percent. The “chances of the real economy emerging unscathed are remote,” economists Dirk Schumacher and Adrian Paul said.

The SNB on Aug. 10 almost tripled banks’ sight deposits to 80 billion francs and said that the “massive overvaluation” of the franc poses a threat to economic growth.

With general elections just two months away, lawmakers, have increasingly rallied behind SNB policy makers to avert job losses and prevent companies from moving production sites abroad. Swiss Economy Minister Johann Schneider-Ammann said last week that the central bank “wants to feel that it’s being supported on significant decisions.”

The Social Democratic Party, the country’s second-largest, said in an e-mailed statement today that while the SNB’s measures are “going in the right direction,” they’re “not yet sufficient,” to protect the economy.

‘Ultimate Weapon’

The central bank has been reluctant to resume purchases of foreign currencies after efforts to weaken the franc in the 15 months through mid-June 2010 caused a record loss of $21 billion last year and sparked calls such as from Christoph Blocher, vice president of the People’s Party, for Hildebrand to resign.

“Central bankers burnt their fingers with massive currency purchases already,” said Alexander Koch, an economist at UniCredit Group in Munich. “They probably wait for the right moment to eventually launch their ultimate weapon” by introducing a franc target versus the euro.

Jordan said in an interview with Tages-Anzeiger newspaper published on Aug. 11 that policy makers will act “as soon as we’re convinced that it’s the right time,” calling the situation “serious.” Policy makers considered the liquidity injection the “appropriate” measure, he said.

Michael Saunders, an economist at Citigroup Inc. in London., said he’s not convinced whether it will work.

“The SNB is not tackling the exchange rate directly,” he wrote in an e-mailed note today. “It’s unclear if this further expansion of quantitative easing will be enough to cap the franc if euro strains persist.”

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