Swiss National Bank interim Chairman Thomas Jordan is facing a showdown with investors as his currency policy endures the biggest credibility test to date.
Within minutes of the franc breaching the 1.20 ceiling versus the euro yesterday for the first time since the measure was introduced on Sept. 6, the central bank declared its determination to fight any further attacks. Jordan, 49, is now in a face-off with investors probing just how far he will go to enforce that threat.
“It’s a wake-up call for the SNB,” said Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva. “They’ve been very successful with their verbal intervention and this is a classic street fight between central banks and markets. Their credibility is going to be questioned and they’ll have to respond in some way.”
The franc, which is considered a haven in times of turmoil, strengthened for a second day after Spanish Prime Minister Mariano Rajoy said that his nation is confronting “extreme difficulty.” The euro region’s fourth-largest economy sold 2.59 billion euros ($3.4 billion) of bonds this week, just covering the minimum amount targeted.
The Swiss currency traded at 1.20186 versus the euro at 6:01 p.m. yesterday in London after surging as high as 1.19995. It has stayed at an average of 1.2069 versus the single currency since Jordan took over as interim chairman on Jan. 9.
“Risk aversion has increased, people want to avoid the euro,” said Claude Maurer, an economist at Credit Suisse Group AG in Zurich. “The SNB was probably hoping for a more relaxed Easter break. Jordan’s job won’t get any easier.”
The breach of the ceiling follows an interregnum at the helm of the central bank that is approaching the end of its third month. Jordan was appointed interim chairman after Philipp Hildebrand was forced to quit in January over a currency transaction by his wife, leaving the SNB board with only two members.
The SNB’s supervisory board will discuss the selection of a successor to Philipp Hildebrand on April 13, according to a person with knowledge of the meeting’s agenda. The Bank Council will consider candidates and then propose one to the Swiss government, which has the final say, said the person, who declined to be identified because the matter is private.
Jordan, the frontrunner for the post, described the franc as still “very, very strong” in his latest public remarks on March 15, and reiterated that policy makers are ready to take further measures “if there’s a worsening of the situation.” The Zurich-based central bank on that day kept the ceiling at 1.20 and maintained its benchmark interest rate at zero, saying it still sees deflation threats.
SNB board member Jean-Pierre Danthine said this week that the franc remains “overvalued,” according to the Tribune de Geneve newspaper. While the franc cap helped exporters “avoid the worst,” annual rates in consumer prices will continue to decline this year, he said.
The SNB applies a “zero-tolerance principle” on its cap, Danthine said as recently as March 22. It “ensures day and night that the minimum exchange rate is maintained -- from Sunday night when the markets open in Sydney until Friday night when markets close in New York.”
The SNB last month lowered its inflation projections throughout the entire forecast horizon, partly as the franc’s ascent pushed down costs of imports. It forecast that consumer prices will fall 0.6 percent this year, before inflation returns in 2013 with a rate of 0.3 percent, accelerating to 0.6 percent in 2014. The economy may expand around 1 percent this year, it said.
Michael Derks, chief strategist at FXPro Financial Services Ltd., said data yesterday showing that Swiss consumer prices rose 0.6 percent in March from February may also have “emboldened traders” by throwing “into question the SNB’s projection that the economy would experience deflation this year.”
“The SNB is being put to the test, with euro-franc now very close to the 1.20 ceiling that it has vowed to defend,” Derks wrote in an e-mailed note from London. “Suddenly, the old safe-haven favorites are back on the big stage.”
The central bank introduced the franc ceiling after the euro area’s fiscal crisis prompted investors to pile into the currency, pushing it to near parity with the euro. It has weakened about 7.7 percent against the euro since the cap’s creation after surging as much as 37 percent in the previous 12 months.
While the SNB doesn’t disclose whether it’s intervening in markets to defend the ceiling, its foreign currency reserves were at 237.5 billion francs ($258 billion) at the end of March, up from 227.2 billion francs the previous month, according to a statement published yesterday. The central bank spent 17.8 billion francs in 2011 to stem what it called the currency’s “massive overvaluation.”
Melinda Burgess, a currency analyst at Royal Bank of Scotland Group Plc in London, said ongoing euro-region tensions may keep the franc close to the 1.20 ceiling.
“We’ve seen a brief breach and markets may very well want to test the SNB,” she said in a telephone interview. “The euro has its own issues at the moment in terms of periphery stress starting to come back to the fore. But the SNB stance will be to stand tightly behind the floor.”