Swiss Franc Cap Tested as Gold Bugs Push Referendum

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Swiss Gold Vote a Central-Bank-Policy Threat as Yes Means Buying
The word "Switzerland" sits stamped on the side of a newly manufactured 400 ounce gold bar at a precious metal refinery near Mendrisio. A “Save Our Swiss Gold” victory means Switzerland would face buying the metal at prices that quadrupled since it began selling more than half its reserves in 2000. Photographer: Gianluca Colla/Bloomberg

Switzerland’s referendum on boosting gold reserves is already increasing pressure on the franc’s cap against the euro, even as polls show voters remain undecided.

A rally in the franc pushed it to within 0.2 percent of the 1.20-per-euro ceiling set by policy makers in an effort to support the economy. That’s the closest it’s come to breaking through the cap since September 2012, when the central bank last intervened to defend it. Options traders boosted bullish bets on the franc to a two-year high.

The Nov. 30 referendum will ask voters whether the Swiss National Bank should keep at least 20 percent of its assets in gold, up from 8 percent now. To get the bullion, the central bank would need to sell foreign reserves, much of them in euros. That selling would drive the euro lower versus currencies around the world, including the franc.

“We’re already moving in the direction of 1.20 as the referendum comes more into focus,” Georgette Boele, the global head of foreign-exchange and commodity strategy at ABN Amro Bank NV in Amsterdam, said by phone on Nov. 7. “If the vote passes, then a break is probable.”

Franc’s Gain

The franc appreciated to 1.20218 per euro today, the strongest level since Sept. 5, 2012, the same month the SNB says it last bought foreign currency to defend the ceiling. It traded at 1.20258 as of 1:28 p.m. in New York, after climbing 2 percent this year.

Boele attributed the rally to a combination of investors fleeing euro-denominated assets because of European Central Bank stimulus measures and the looming referendum.

In addition to putting immediate pressure on the cap, a shift into more gold would also present long-term problems for central bankers.

When they need to weaken the franc, they buy foreign exchange. To maintain the new reserves ratio, they’d need to purchase gold as well, a system strategists say would be unwieldy. The SNB’s assets have expanded by more than a third in the past three years, and it holds more in euros than in any other foreign currency.

An Oct. 24 opinion poll by researcher gfs.bern saw 44 percent in favor of the “Save Our Swiss Gold” campaign, with 39 percent against and 17 percent undecided. The company surveyed 1,206 people from Oct. 13-18 and cited a margin of error of plus or minus 2.9 percentage points.

An online poll by 20 Minuten published Oct. 31 showed 47 percent against, 38 percent in favor and 15 percent undecided. The survey of 12,491 people was conducted on Oct. 27 and results were weighted according to political and geographic variables.

‘Immediate Pressure’

“A lot depends on the turnout,” Geoffrey Yu, a London-based senior currency strategist at Switzerland’s biggest bank, UBS AG, said in a Nov. 4 phone interview. “In the unlikely event it actually does come through, I think there’ll be immediate pressure on the cap.”

Silvia Oppliger, a spokeswoman for the SNB in Zurich, declined to comment on whether the new rules would force Switzerland to abandon the currency ceiling.

Options traders turned bullish on the franc on Oct. 31 for the first time in a month. They paid a 0.67 percentage-point premium for three-month contracts to sell the euro versus the Swiss currency over those allowing for purchases, data compiled by Bloomberg show. That’s the most since October 2012.

Gold Reserves

The plan, which would also block sales of gold reserves and require the bars to be held in the country, would encourage traders to speculate against the central bank, SNB President Thomas Jordan said in a Nov. 6 interview with Switzerland’s Neue Zuercher Zeitung newspaper.

Switzerland is holding the referendum because of rules saying that any proposal must be put to a public vote if it gains 100,000 signatures out of a population of 8.1 million.

The initiative was started by members of the Swiss People’s Party, who argue it will preserve national wealth and enhance, rather than diminish, the central bank’s ability to act. They argue the SNB was wrong to sell more than 1,500 tons of gold between 2000 and 2008.

Switzerland introduced the ceiling on the franc’s value in September 2011 after an investor exodus from euro assets amid the sovereign-debt crisis pushed it close to parity with the 18-nation currency.

Policy makers want a weaker franc because it lessens the risk of deflation and can help stoke economic growth. Annual increases in consumer prices stalled at zero percent in October.

Single Breach

The euro cap means Switzerland is “effectively importing the monetary policy of the ECB,” Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London, said by phone on Nov. 5. Yet “risks to the 1.20 level in the short term seem overdone,” he said.

Since the cap’s implementation, it has been breached only once, when the franc climbed to 1.19995 per euro on April 5, 2012, prompting the SNB to intervene in the currency market to nudge it back below 1.20. The central bank has repeatedly said it will take steps to protect the ceiling.

“The SNB is rightly claiming that, to defend the floor, it will be willing to engage in unlimited intervention,” Paul Meggyesi, a strategist at JPMorgan Chase & Co. in London, said by phone on Nov. 5. “On the other hand, you’ve got the Swiss people that will be putting at least one balance-sheet constraint on the SNB. It’s not game over for the floor, but it certainly increases the likely stress.”

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