Swiss Pleas to Raise Franc Cap Fail to Sway SNB on European Debt Crisis
The Swiss central bank is resisting calls from executives and politicians to further weaken the franc amid investor demand for a haven from the region’s sovereign debt crisis.
UBS AG analysts estimate defending the franc’s cap of 1.20 per euro cost the Swiss National Bank about 5 billion francs ($5.7 billion) in September, while government ministers and labor unions say the initiative is still putting jobs at risk. Policy makers have toughened their language in an effort to weaken the currency further and may be unwilling to absorb the expense of adjusting their limit after currency purchases led to a record loss in 2010.
“Obviously, they’re under enormous pressure,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva, by phone on Nov. 8. “Their verbal intervention has really convinced the market that the next move is going to be higher and that’s enormously effective without costing them anything. They’ll continue to use a very hawkish tone.”
The Zurich-based SNB, led by Philipp Hildebrand, imposed a cap for the first time in three decades on Sept. 6 after investors sent the franc 17 percent higher against Europe’s shared currency in the previous 12 months. It approached parity on Aug. 9, strengthening to a record 1.0075 per euro, while boosting the threat of deflation, weighing on economic growth and increasing the relative cost of exports.
The franc traded at 1.2319 against the euro at 4:31 p.m. in Zurich, little changed on the day.
SNB Vice President Thomas Jordan said Nov. 7 that the franc was still “very, very strong” and said policy makers are ready to ward off price threats if needed. He declined to comment on whether the central bank has considered whether to raise the cap, saying the franc may remain under pressure “for a while.”
“Our mandate is very clear: We need to deliver price stability and make a contribution to the stabilization of the economy,” he said. “We are monitoring the situation permanently. We are analyzing it and if there is a reason to act, we are obviously ready to take further measures.”
With exports accounting for about half of gross domestic product, the Swiss economy is vulnerable to a strengthening currency. Consumer prices unexpectedly dropped last month from a year earlier and household sentiment slumped more than economists forecast to the lowest in more than two years.
Swiss Economy Minister Johann Schneider-Ammann last night called the franc still “massively overvalued.”
The central bank will hold its next quarterly meeting on Dec. 15. In September, it forecast that economic growth would “come to a halt” in the current half with consumer prices declining 0.3 percent in 2012. That would be the first drop since 2009 when the economy was in recession.
Past efforts to stem the franc’s advance and deflation risks, including 15 months of currency sales, contributed to the central bank’s record $21 billion loss in 2010. The SNB more than quadrupled its currency holdings over 15 months beginning in March 2009 before suspending interventions in June last year.
“If the SNB at some point feels that the deflation risk has increased relative to the September assessment, raising the floor is pretty much the only instrument it has left,” Beat Siegenthaler, a currency strategist at UBS in Zurich, said by e- mail on Nov. 7. “The likelihood of the next quarterly assessment being more downbeat and resulting in the euro-franc floor being lifted has increased substantially.”
While most companies have welcomed the SNB’s decision to impose a ceiling, the Swiss Labor Union Federation, representing about 380,000 workers, said Oct. 18 that the central bank should raise the ceiling to at least 1.40, describing the consequences of the currency’s ascent as “dramatic.” Hans Hess, head of Swissmem, the nation’s largest lobbying group for manufacturers such as ABB Ltd., has said the franc threatens about 10,000 jobs.
Swiss companies are already cutting jobs and moving production abroad to help protect earnings. Novartis AG (NOVN), Europe’s second-largest pharmaceutical company, announced plans Oct. 25 to eliminate 1,100 jobs in its home market and create about 700 positions in low-cost countries such as China.
About 30 percent of the participants in a survey of 35 analysts called the current franc ceiling too low, with about half projecting an increase, Credit Suisse Group AG said Oct. 20. The survey was conducted Oct. 6-17.
“The SNB has achieved a lot of success,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, said on Nov. 7. “They are using strategic ambiguity now. They are keeping the market guessing about a potential higher ceiling and that’s doing the heavy lifting for them.”
Japan has also taken steps to curb record strength in its currency, intervening to weaken the yen for the third time this year on Oct. 31. That makes it more difficult for the SNB to adjust its currency ceiling, Swissquote’s Rosenstreich said.
“The problem with raising the floor is that you also have to defend it,” he said. “They’re still concerned about a sudden rush into safe havens. With the Bank of Japan (8301) standing behind the yen, there’s further pressure on the franc.”
The Swiss currency will depreciate to 1.24 by the end of June, according to the median forecast of 30 analysts in a Bloomberg survey. That compares with a median estimate of 1.18 before the ceiling was introduced.
Jordan said earlier this week while the franc remains “at a high level and must continue to depreciate over time,” the currency’s further development will hinge on factors beyond policy makers’ control. The euro-area crisis “probably won’t disappear” anytime soon, he said.
“The Swiss have been very successful in holding the line. I don’t think the SNB will raise the cap to 1.25 because they don’t want to push their luck,” Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, said by e-mail on Nov. 7. “They would like euro-Swiss higher, but that’s dependent on an alleviation in European tensions.”