When playing the foreign-exchange markets, Thomas Jordan might be showing too much of his hand.
That’s a conclusion of Julius Baer Group Ltd. Chief Economist Janwillem Acket, who says the Swiss National Bank president could consider the approach of colleagues in another small, open economy with a large financial sector: Singapore.
The SNB’s reserves have ballooned as it fights speculative attacks on the franc with interventions focused on the euro exchange rate that are then signaled in weekly deposit data. In contrast, Singapore’s main policy tool is a basket of currencies of major trading partners whose exact composition isn’t divulged, with less transparency on foreign-exchange purchases.
“The SNB needs to get room to maneuver again without the millstone of markets around its neck,” Acket said in an interview in Zurich. “A sophisticated Singaporean-style currency basket would allow the SNB a consistent policy of price stability. At the same time it would relieve the economy of the effects of hardly controllable currency shocks.”
The SNB’s potential need for a strategy rethink follows the abandonment of its franc ceiling in January when it faced a wall of money as euro-area quantitative easing was poised to start. With the Swiss economy possibly having suffered a recession and the franc stubbornly strong, analysts are wondering what options the central bank has at its disposal.
‘All About Credibility’
Chris Turner, head of currency strategy at ING Groep NV in London, said a Singapore-style basket “is an option” for the SNB. “It’s all about credibility really and if you’ve got an undisclosed basket you can have that kind of flexibility of arrangement but not be completely beholden to the market regarding to how you’re managing it.”
The Monetary Authority of Singapore intervenes when needed to keep the exchange rate within an unspecified policy band. It doesn’t say what range the band covers or where its currency is within the band.
That approach differs markedly from that of the SNB. Since the collapse of Lehman Brothers in 2008, the central bank has repeatedly bought euros to stem the appreciation of the franc, which investors flock into at times of high market stress.
Before the introduction of the cap in September 2011, interventions often took the form of big salvos to the market. While they temporarily pushed the franc down by several centimes, these moves were eroded by anxious investors.
Then, between 2011 and early 2015, the SNB had an outright ceiling on the franc of 1.20 per euro and used interventions to defend it with what it repeatedly termed “utmost determination.” Quarterly reserves data yielded insight into its market activities.
The franc has appreciated 14 percent since the SNB’s cap exit. It traded at 1.05181 at 1:49 p.m. Zurich time, little changed on the day.
Even with the ceiling gone, economists keep a close eye on the SNB’s weekly data on sight deposits and monthly figures for foreign exchange reserves to gauge the scope of its interventions. At press conferences and at public events, Swiss rate setters get grilled on their reserve management.
By contrast, Singapore’s model -- with an undisclosed basket, no accounts of meetings and few media interviews -- discloses only very little information.
“Right now everyone can see what the SNB is trying to do,” said Ipek Ozkardeskaya, an analyst at London Capital Group Ltd. “If the market wants the franc higher, it will just push it higher.”
A potential sticking point for Switzerland may be that for decades the franc has been regarded as the global haven currency par excellence. It was the world’s sixth most traded currency in 2013, with a daily trading volume nearly four times as large as that of the Singapore dollar, according to Bank for International Settlements data.
“Singapore’s system works well because it has been in place for such a long time and so the market knows how it works,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “But it is a unique system and therefore introducing it wholesale in another country I think will be very challenging indeed.”
The SNB has been under pressure to become even more transparent. Implementation of an undisclosed currency basket could therefore elicit opposition in a country famous for its direct democracy in which voters get to weigh in on matters ranging from tax to health care to corporate governance.
Following the SNB’s shock move in January, there have been calls for minutes of policy makers’ meetings to be published, governing board members to be elected by parliament and the three-person board to be expanded.
In Singapore, there is little political opposition on the island to demand more transparency on monetary policy. The ruling People’s Action Party, which has a majority of seats in parliament, has been in power since the country’s independence in 1965.
“This form of policy requires a certain degree of discretion and confidence about a de facto appreciation bias so that it is not overly vulnerable to speculative attacks,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “Here is where I think Singapore and Switzerland would differ.”
For more, read this QuickTake: Currency Pegs