Investors may have to think twice before taking on Philipp Hildebrand and his printing press at the Swiss central bank.
Chairman Hildebrand’s pledge to use “unlimited” quantities of cash to put a lid on the franc means that officials stand a greater chance of success than their intervention efforts of 2010, said analysts including Credit Agricole SA’s Daragh Maher and UniCredit Group’s Alexander Koch.
“This strategy is not doomed to fail and it would be a mistake to assume that speculators are bound to win,” Maher, deputy head of global foreign-exchange strategy at Credit Agricole SA in London, said in a note to investors. “The SNB may have backed itself into a corner, but when cornered, the determination to fight is often the strongest.”
Hildebrand, 48, has been trying to get the franc under control since he took charge of the central bank in January 2010. A 15-month campaign to sell the franc was abandoned in June last year after currency reserves surged, sparking a $21 billion annual loss and prompting calls for his resignation. The Swiss National Bank last month renewed its efforts by cutting interest rates to zero and flooding money markets with liquidity.
“The SNB won’t give up that easily,” said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. “Over the short term, there’s no limit to how much money the SNB can print. In the short term, they have unlimited pockets.”
First Since ‘78
The SNB yesterday set a ceiling of 1.20 versus the euro, the first such move since 1978, after the European debt crisis and concerns about a new global recession pushed it to a level the bank described as “massively overvalued.”
The franc, considered a haven in times of global turmoil, dropped by a record against the euro yesterday. It was little changed at 1.2055 at 9:06 a.m. in Zurich and traded at 85.66 centimes versus the dollar. Surging as much as 21 percent against the single currency this year, it reached an all-time high of 1.0075 on Aug. 9, trading near parity.
With exports accounting for about half of gross domestic product, the economy has been vulnerable to the franc’s ascent. Chemicals company Clariant AG on Sept. 5 cut its full-year targets for sales and profitability, citing “increasingly difficult economic conditions” and a stronger currency.
Economic growth slowed to 0.4 percent in the second quarter from 0.6 percent in the previous three months. That’s the worst performance since the economy emerged from a recession in 2009.
“Of course it would have been easier to defend a significantly lower level of say 1.10 or even parity,” said Koch, an economist at UniCredit in Munich. “But this would not have been much help to take pressure from Swiss exporters. Even 1.20 should still lead to substantial negative effects on the economy.”
The danger for Hildebrand, who joined the SNB from the hedge fund Moore Capital Management in 2003, is that the global economic outlook deteriorates to such an extent that investors keep piling into the franc. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Sept. 5 that financial conditions remind him of late 2008, when the collapse of Lehman Brothers Holdings Inc. sparked a global market panic.
“The risk is that the SNB gets washed away with global risk aversion,” said Robson. “The fortunes of the franc largely remain with what happens in Frankfurt and Paris.”
The SNB is also taking on the $4 trillion-a-day foreign exchange market just as other central banks try to steer their currencies. Japan last month intervened again to stem a rising yen and Finance Minister Jun Azumi says he will use this week’s meeting of Group of Seven policy makers to highlight the danger it poses to his economy. Brazil’s authorities have also sought to weaken the real.
Switzerland’s decision to impose a ceiling may spur demand for the yen and Australian dollar, Bangko Sentral ng Philipinas Governor Amando Tetangco said. With “one less hard currency to ‘share’ the burden, volatility in the markets can increase, particularly in emerging-market economies,” he said.
“Let’s see how that works,” Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “The currency wars are heating up.”
For now, Hildebrand’s drive will be helped by the fact that politicians facing national elections are rallying behind his cause in order to avert job losses and a recession. At a meeting in Bern on Sept. 2, all five ruling-coalition parties signaled their support to Hildebrand.
Hildebrand has the added advantage that he’s trying to weaken rather than strengthen the franc, meaning he won’t face the threat of depleted reserves that eventually sank Asian economies during the region’s currency crisis in the late 1990s.
Jim O’Neill, chairman of Goldman Sachs Asset Management in London, said the SNB had the “utmost justification” for its decision, calling the franc’s appreciation “ridiculous.”
“The Swiss are forcibly saying ‘don’t put all the stresses on us,’” he said. “Once a central bank puts a misaligned currency at the center of policy making, you go with it. Simply intervening in the franc won’t solve all the world’s problems but it might help markets be more balanced in their herd-like panic about some of these issues.”