SNB’s Franc Respite Fades as Inflow Threat Seen in 2013
The Swiss franc’s rebound from a three-month low against the euro shows that even bank charges for deposits and a lull in Europe’s debt crisis can’t deter demand for the currency.
The Zurich-based Swiss National Bank will keep its franc ceiling at 1.20 per euro tomorrow, according to all 14 analysts in a Bloomberg News survey. While the currency weakened after Credit Suisse Group AG (CSGN) said on Dec. 3 it would set negative rates for franc cash balances, it pared almost all those losses in a three-day run of gains. A similar move by UBS AG (UBSN) yesterday failed to push it beyond last week’s low of 1.2168 per euro.
Switzerland’s central bank amassed record foreign currency holdings that reached 429 billion francs ($461 billion) in September as it defended the ceiling imposed a year earlier. While pressure from investors seeking a haven eased since a European Central Bank pledge to purchase government bonds, SNB President Thomas Jordan has said it’s too early to discuss abandoning the measure.
“The resilience of the franc is a testament to the fear lingering in markets,” said Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva. “There are concerns that the problems of the European crisis are far from over. The SNB still has work to do.”
The franc traded at 1.2119 per euro and 93.02 centimes per dollar as of 6:17 a.m. New York time today. It depreciated as much as 0.4 percent versus its 17-nation peer yesterday after UBS said it would set charges on deposits for financial institutional clients. The currency slid to the weakest level since Sept. 17 on Dec. 5, before rebounding to 1.2075 per euro at the close on Dec. 7.
SNB policy makers introduced the cap after the franc strengthened to near parity with the euro in August 2011, hurting exporters such as Swatch Group AG (UHR), the largest Swiss watchmaker, and increasing the threat the economy would slip into deflation. Jordan has said it will defend the measure with the “utmost determination” by buying “unlimited quantities” of euros.
The central bank, which holds a press conference at 10 a.m. in Bern tomorrow following a meeting of its three-member governing board, will leave the benchmark interest rate at zero, according to all 18 economists in a Bloomberg News survey.
“Demand for francs depends significantly on the risk appetite of investors,” Jordan said on Nov. 28 in Bern. “Their mood for some time has not -- as usual -- been influenced by economic and corporate news, but by progress and setbacks in tackling the European debt crisis.”
While the euro has rallied about 0.9 percent against the franc since the ECB said it was working on a bond-buying plan to tame borrowing costs on Aug. 2, Europe’s turmoil remains unresolved. No country has formally requested sovereign aid, a condition of the central-bank debt purchases, while Italy faces an election next year that risks opening a new front in the crisis fight.
“The uncertainty surrounding that general market disruption is going to mean more safe-haven flows into Switzerland,” said Jennifer McKeown, a senior economist at Capital Economics Ltd. in London. “The SNB will continue to intervene quite heavily, but it has already built up these massive foreign currency reserves so they might struggle.”
The reserves were at 424.8 billion francs at the end of November, or about 72 percent of Swiss gross domestic product.
The accumulation saw Switzerland overtake China as the world’s leader of foreign exchange-rate management this year, according to data compiled by Bloomberg. Switzerland added $152 billion to its foreign-exchange reserves during the 12 months through June 30. In the same period China, the world leader in 2010 and 2011, added $43 billion.
UBS said in a notice two days ago it would communicate the charges on deposits to clients within days.
“Negative rates are another vehicle to try to dissuade markets from buying into the franc,” said Ken Dickson, an Edinburgh-based investment director of currencies at Standard Life Investments, which manages about $264 billion. “In the eye of the storm, when markets are very concerned about the immediate prospect of a major event, they are not that concerned about a negative interest rate.”
Fixed-income investors are already willing to pay for the safest assets. Swiss government bonds with maturities of up to four years have negative yields, while rates on German, Austrian, Dutch and Finnish two-year notes have also dropped below zero this year. A negative yield means investors who hold the notes to maturity will receive less than they paid.
As the euro region’s fiscal crisis worsened over the past year, pushing Spain and Cyprus to seek external aid, the SNB upheld its defense. The Swiss currency breached the ceiling just once in that period.
The franc is seen trading at 1.22 per euro at the end of June next year, according to the median of 42 analyst estimates in a Bloomberg News survey. JPMorgan Chase & Co. is the only participant predicting a breach of the cap. Capital Economics, which isn’t included, sees the parity with the euro by the end of next year.
“The franc’s safe-haven status will slowly diminish over time,” said Standard Life’s Dickson. “It is going to be easier for the SNB” over the next few months, he said.
The franc has weakened 1 percent in the past six months, the third worst performer, based on Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar declined 4.4 percent and the yen has dropped 8.7 percent.
The SNB will also release its latest economic projections tomorrow. In September, it forecast an expansion of 1 percent in 2012, with consumer prices decreasing 0.6 percent this year, before increasing 0.2 percent and 0.4 percent in the two following years.
Economists in a Bloomberg News survey estimate the economy will expand 0.9 percent this year and 1.1 percent in 2013. By contrast, the euro-area, Switzerland’s largest export market, is seen shrinking 0.5 percent this year, before expanding 0.1 percent in 2013.
“We’ve already seen the euro zone fall into recession,” Capital Economics’s McKeown said. “Once Germany and France fall back in, which I think they’re going to in the coming months, there’s going to be a lot of upward pressure for the franc.”
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