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Have Swiss won currency war with ‘shock and awe’ franc move?

Analysts are divided as to whether the Swiss National Bank will be able to maintain the peg and save Switzerland from a downturn.

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by Max Julius on Sep 06, 2011 at 12:24

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Have Swiss won currency war with ‘shock and awe’ franc move?

The Swiss National Bank has bent markets to its will by setting a minimum rate for the franc against the euro, but analysts are divided as to whether the central bank will be able to maintain the peg and save Switzerland from a downturn.

In a brief statement, the SNB warned today that it would ‘no longer tolerate’ a rate below CHF 1.20, saying it sought ‘a substantial and sustained weakening of the franc.’ It pledged to buy unlimited quantities of foreign exchange to do so, if necessary.

Currency and equity markets reacted strongly: the euro surged 8.43% to CHF 1.203, the dollar jumped 7.65% to CHF 0.847 and the Swiss blue-chip SMI stock index advanced 4.4%, or 227 points, to 5,370.

Analysts branded the SNB’s decision as ‘aggressive’ and ‘powerful,’ following months in which it has seen the currency surge as investors sought safe haven assets, harming Swiss exporters and the wider economy.

Carl Jani, senior trader at foreign exchange broker Schneider FX, called the move ‘the most aggressive policy response since 2008.’ He said that while it was not a ‘straight-out peg,’ since the franc is still a free-floating currency, the SNB would be able to maintain it as long as the bank liked.

‘They can just print as much of their own currency as they want and pile it into mainly the euro,’ he pointed out.

The dramatic intervention came after world leaders warned of an impending ‘currency war,’ in which countries aggressively devalued their currencies to boost exports. It also followed repeated attempts by Japan to curb the strength of the yen, which is similarly seen as a safe haven currency.

The franc will stick ‘stubbornly’ to the CHF 1.20 mark, according to Chris Towner, director at HiFX, the currency dealer, and may even fall further. ‘They put their minimum at 1.20, but who’s to say that in two months’ time they don’t push it up to 1.25?’ he asked.

But Paul Mackel, analyst at HSBC, said the central bank had entered an endurance contest whereby it needed ‘to fight hard’ against a market that could soon test its resolve.

In a research note subtitled ‘shock and awe,’ he wrote: ‘Putting EUR-CHF at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place.’

Indeed, investors had sent the Swiss currency to all-time highs versus the euro and dollar amid mounting fears over global debt and growth – which appear unlikely to abate in the near-term.

And according to Jennifer McKeown, senior European economist at Capital Economics, the CHF 1.20 level is still ‘relatively high,’ implying that the Swiss economy will suffer, nonetheless. Citing the franc’s long-run average of about CHF 1.69, she added: ‘In the end, we suspect that Swiss exports will drop anyway.’

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10 comments so far. Why not have your say?

If I were in charge of this Swiss move, I'd have picked a different currency to peg to. Tomorrow, a German court delivers its verdict on the legality of the bail outs...

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Now it starts,who will be the first to bail out from the € ?

The basic principle of the European concept was free trade between boarders of memebers states but the implimentation of artificial fixed rates on currency also required a fiscal structure of taxation between states but that not going to happen, so how are we to protect our personal wealth? Commodites (XAU & XAG) and strong currencies are the resort which will be the safe haven.

Unless we get free unhindered trade in the EU then slowly the countries like Italy who won't impose hihger taxes will join Greece in the drop out. Scarap the CAP and let's see where the opportunities are for exporting.

Batten down, it's just starting.

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@Taff Trader,

"The basic principle of the European concept was free trade between boarders of memebers states.."

I believe that is what British politicians sold to the British public in the fifties and sixties, especially with EFTA. They never clearly expalined to the British what the Common Market actually was about.

A Free Trade area alone is not what the founder states of the Common Market had in mind exactly. This difference lies at the core of Britain's half hearted membership of what has become the European Union.

Schumann... "proposed that: "Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organisation open to the participation of the other countries of Europe." Such an act was intended to help economic growth and cement peace between France and Germany, who had previously been long time enemies. Coal and steel were particular symbolic as they were the resources necessary to wage war. It would also be a first step to a "European federation".

http://en.wikipedia.org/wiki/History_of_the_European_Coal_and_Steel_Community_%281945%E2%80%931957%29

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Back in the seventies I voted for:

"...free trade between boarders of memebers states.."

Certainly not the bureaucratic monstrosity has resulted. The sooner we have another referendum on whether we should remain in what has now become the EU the better.

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Borders / member states ? they are all at it.

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We don't need to leave just tell them that we are in a mind to renegoiate the Lisbon Treaty and cut our subs by 50% .

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@Albert Fisher

I have looked at your reference on Wikipedia and it did not contain much information I was not already aware of having lived in a number of European Countries and been around from before the European Coal and Steel Community started.

Clarify "bureaucratic monstrosity"? Where do I begin? So many examples - I would have thought you would not need to ask. E.g

CAP.

Euro.

The ineffectual European Parliament.

The continuing stream of regulations emanating from Brussels

Rubbish Light Bulbs

Baroness Ashton

Vast numbers of civil servants on high salaries and even higher pensions, many of whom oscillate between Brussels & Strasbourg.

Spending billions of British taxpayers money.

Open borders that mean that at times of high unemployment we are still importing lowly skilled workers.

Loss of our sovereignty.

Etc.

Difficult to say what Europe would be like without the EU but Britain would be a better place if we had remained in just a free trade area like EFTA. Most of Europe would be a better place without the Euro. Some say that the EU has kept the peace in Europe for the past fifty years; not true - that has been achieved by NATO.

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Nobody has satisfactorily explained to me what would happen if the UK government openly defied the non-elected euro- bureaucracy, for example on labour laws, light bulbs, wind turbines, human rights etc . So, they would impose fines, but if we were to say we are not paying the fines, what would then happen? Would they nuke us?Would they not speak to Osborne at the next G8 meeting (or is it 9)? Would British MEPs find that the Petrus did not stop at their glass at the next word-fest? Why do we not play hardball?

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Good old Switzerland, the sanest state in the world.

Neutral in wars while resolute in self-defence with a citizen army and the impartial humanity of the Red Cross.

Amateur politicians, rotating in office, who are never allowed to be famous or bossy. Maximum localism. A capitalist country which understands the place of collective provision and has the best public transport on the planet.

A rock-ribbed commitment to sound finance at home with a currency the world covets. Successul multiculturalism in four languages, but no safe haven for alien spongers or citizenship handed out like toffee apples. And a financial services business which flourishes but knows its place, with plenty of strong industry too.

So what's the smart world's verdict? 'Boring'. We should have more Swiss boredom in Britain.

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William Bishop

Sep 11, 2011 at 16:15

The Swiss can probably hold the line for a while, but not in the longer term if markets really decide to take the SNB on.

On what others seem to prefer to discuss, the British have always underestimated the almost ideological drive among most continental European opinion leaders in favour of anything that seems a step towards a more politcally united Europe. Consequently, the free trade area with no integrationist political superstructure, which is what most in the UK would prefer, has never been on offer. It may be a bit fanciful, but I do wonder if something more like this might finally be available, if, as a result of the eurozone crisis, the EU fragments into some sort of two-tier structure.

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