Switzerland's Ambition for a Weaker Franc Seen as a Forlorn Hope

  • Options traders most bullish on franc versus euro among majors
  • SNB threatens intervention to curb its `overvalued' currency

Currency markets just won’t cooperate with Thomas Jordan.

When the Swiss National Bank president repeated a warning for buyers to steer clear of the “significantly overvalued” franc last week, the impact of his words was blunted by a European Central Bank pledge to reassess its stimulus plan. Switzerland’s currency reacted by jumping the most since mid-October. Then Friday’s better-than-forecast U.S. jobs report undermined the euro and pushed the franc to a two-month high. Options traders are more bullish on the franc versus the shared currency than any major peer.

The outlook for the franc underlines the challenge Switzerland faces as it tries to reverse 12 straight months of falling consumer prices. That’s being exacerbated by the euro’s renewed weakness. Pressure from speculators lured by Switzerland’s current-account surplus already forced Jordan and his colleagues to abandon a cap on the franc’s value back in January.

“There’s been a long-running desire in the SNB to talk their currency down,” said Daragh Maher, head of U.S. foreign-exchange strategy in New York at HSBC Holdings Plc, the most bullish forecaster in Bloomberg’s franc survey. “Since the SNB changed their policy earlier this year, they’ve lost some traction in the market.”

Europe’s biggest bank sees Switzerland’s currency climbing 12 percent by the end of next year to 95 centimes per euro, from 1.0766 francs as of 10:12 a.m. New York time on Tuesday. The franc surged to a record 85.17 centimes to the euro after the SNB scrapped its 1.20-per-euro limit on Jan. 15, relying instead on charging banks for deposits and selling francs in global markets.

Risk Reversals

The risk-reversal rate measuring the cost of options to buy the franc versus the euro in a year’s time over contracts to sell was at 2.3 percentage points. While the premium has shrunk since emerging markets were in meltdown around the middle of the year, it’s still the highest among 25 major currencies tracked by Bloomberg.

The SNB’s appetite for intervening may be limited by its increasing foreign-exchange stockpile.

The central bank’s foreign reserves grew to a record 550.9 billion francs ($549 billion) in October, data showed Friday. The expansion of its balance sheet leaves the SNB vulnerable to the vagaries of currency swings, and officials cited its stockpile when reporting a loss on Oct. 30.

Depleted Arsenal?

“They’ve clearly signaled that they’re not comfortable with extending the balance sheet in an uncontrollable manner,” said Esther Reichelt, a Frankfurt-based strategist at Commerzbank AG, which sees the franc ending the year at 1.07 per euro. “They’ve signaled they don’t want to continue intervening without limit.”

Zurich-based SNB spokeswoman Silvia Oppliger declined to comment.

Median forecasts in a Bloomberg strategist survey are for the currency to remain little changed at 1.08 through Dec. 31 before ending 2016 at 1.10.

Combined with the ECB’s renewed commitment to quantitative easing, speculation the SNB has limited intervention firepower has supported the franc since mid-September, after it weakened in the four months from June.

Switzerland’s currency barely moved on Nov. 3 when Jordan acknowledged the franc’s “safe-haven status” and reiterated his commitment to keep intervening. Shortly afterward, ECB President Mario Draghi confirmed he’d consider revamping his bank’s bond-purchase program in December. The following day, the franc jumped 0.7 percent versus the euro, the most in three weeks.

Increasing the ECB’s monetary easing would undermine the euro by putting more money into circulation.

Jordan Overwhelmed

At the end of the week, the biggest gain in U.S. payrolls this year sent Europe’s shared currency tumbling versus the dollar and sliding to 1.07374 francs, its weakest level since August.

And the franc remains vulnerable to the risk of global shocks, which tend to boost the currency -- and damage the competitiveness of the economy. Swiss consumer prices fell 1.4 percent in October from a year earlier, weighed down by the stronger exchange rate.

“If there was a big shock to risk sentiment, the Swiss franc would appreciate,” said Anezka Christovova, a foreign-exchange strategist in London at Credit Suisse Group AG. “The Swiss franc prices as a safe haven. It always tends to contain that premium.”

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