Guest Post: High Noon At The Swiss National Bank

Tyler Durden's picture

Submitted by Alexander Gloy of Lighthouse Investment Management

High Noon At The Swiss National Bank

Tomorrow, Thursday (October 6th), the Swiss National Bank will report its foreign currency reserves for September at 9am local (3am EST).

We will know then how much Euros had to be gobbled up in order to defend the “peg”. Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg?

You can’t tell me that we recently had twice as much volume as on September 6, whenthis happened:

The SNB vowed to purchase “unlimited quantities” of Euros to defend the 1.20 barrier. How credible is that? Let’s look at some data:

  • The Swiss Franc amounts for 0.1% of world currency reserves. The Euro is 270 times larger:

Here is what is going to happen:

  •  SNB’s balance sheet will “explode” as they have to buy billions of Euros (a questionable asset, to say the least).
  • For every Euro bought, 1.20 CHF are being released into circulation. CHF monetary base explodes, too.
  • If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
  • According to rumors, the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?
  • In order to discourage speculators, the SNB tried floating rumors they might increase the peg to 1.25 or to 1.30.
  • As the Euro weakens towards the Dollar, the Swiss Franc has to decline, too (in order not to strengthen towards the Euro). This makes the Swiss Franc cheap vis-a-vis the Dollar.
  • A Greek default (or other Euro worries) might make the Euro even weaker, making it harder to keep it stable towards the Swiss Franc.

Please look at the statement by the ECB immediately following the SNB announcement:

  •  It is pretty franc (for a central bank statement anyway).
  • Translated into plain English this means: “We have nothing to do with this decision, we will not support it and we wish the SNB good luck should the peg come under pressure”.
  • This, from a “sister” central bank, is as little support as you can get.
  • The ECB is probably not too happy another central bank is trying to keep the Euro strong.

Of course, there is one difference with the Pound Sterling being kicked out of the ERM (European Exchange Rate Mechanism) in 1992: the Bank of England (BoE), trying to defend its weak currency, had to purchase Pounds and sell other currencies (Deutschmarks etc) from its reserves. When they ran out of Deutschmark to sell, it was game over.

  • In the case of the Swiss Franc, the currency is too strong, so the SNB sells its own currency, and purchasing another currency (EUR).
  • In theory, this can continue ad infinitum. However, each time the SNB sells Swiss Francs, it increases the monetary base, also known as printing money.
  • However, printing too much money will destroy the currency by making it worthless.
  • How much did the SNB “print” so far? Looking at FX (foreign currency) reserves (the opposite entry in the SNB’s balance sheet) they increased from CHF 112bn (end 2010) to 253bn (end August 2011) or from 23% to 50% of GDP. This is BEFORE installing the peg (below chart as of end of Q2; SNB published only quarterly):


  •  It is possible the SNB didn’t have to purchase too many Euros yet, as the market saw no point in immediately attacking the peg. The move from 1.12 to 1.20 was very quick (minutes) and short-covering (from the perspective of a Euro short seller) probably drove most of it. Has the SNB has kept its powder dry?
  • But as Greece defaults and possibly quits the Euro, a run on the Swiss Franc might return. And why not – thanks to the SNB you can get the Swiss Franc much cheaper now – a bargain.
  • How many Euros will it take before the SNB has to give up? Do they have an internal limit? I don’t think so – they probably believe they can handle this. 100% of GDP? 200%?
  • 200% monetary base to GDP would mean 1 trillion CHF or 750bn higher than end of August. At 1.20 that would be equal to EUR 625bn.
  • Currency speculators work with huge leverage; 100 times is not unusual (anybody can open an account at one of the numerous online currency trading shops and speculate with 30x leverage). In order to sell EUR 625bn you would need “only” 6.25bn in equity. The hedge funds are probably circling the SNB like sharks already. Hence the regular leak of rumors of an increase of the peg in order to “burn” speculators.
  • Options will also be part of the attack (if you load up on far-out-of-the-money options, and start moving the price in your direction, delta-hedging by market makers and counter-parties will almost “do the rest” for you).
  • Currently, implied volatility for CHF options is still a bit high. Speculators might wait for it to come down further -paying less time value can increase the leverage significantly for out-of-the-money options.

It is unfortunate to see a people’s money being wasted recklessly and predictably. In the end, the only solution to avoid marking huge currency losses to market would be to join the Euro. Maybe that has been the plan all along – to ignore the people’s will and abolish the Swiss Franc through the back door. Voters could be confronted with the choice of either accepting the Euro or eating billions of losses as the SNB will have to be recapitalized.

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nhr215's picture

Ummm how are you getting volume data for an over-the-counter market???? Is this options or futures volume because it certainly isn't the volume of  EUR/CHF spot trades (which is impossible to know). The graph makes it look like spot trade volume..


Harlequin001's picture

I reckon this peg will be off in a month. When you think about it, if Europe can't fund itself then the US must, otherwise the US goes down in a mass default, which it will anyway. The Fed knows it's in trouble and that the Swiss is a safe haven currency so by introducing a peg there is nowhere to go for institutional money but USD and in particular UST's. The dollar spikes and the US sells its short term debt, funds Europe for a few more days and then its back to square one.

Et voila the US can fund its needs because demand remains high even though the world knows its dollar is toast.  When Bernanke notifies us on the 20th that we have QE4 there will be a run from the dollar to... where? There is no safe haven fiat currency because the Swiss is as bad as the Euro. These dollars can only go to gold and silver so I reckon the peg will come off and the franc will fly. Anything to stop gold and silver rocketing upwards but that is precisely what will happen if this peg stays in place, and I think everyone knows it.

zuuuueri's picture

Just found in my mailbox this evening a pamphlet with isgnature card for an initiative to force the SNB to not sell any more gold, to maintain minimum 20% reserves in gold, and to store all the gold physically inside switzerland. Don't know whether they'll get enough force behind it to do anything, but there is a growing opposition in swiss society to these shenanigans being played by the bankers.

GeneMarchbanks's picture

The Swiss people are so (materially) comfortable that it's going to take something much more major for them to do anything about what their national bank does. Even then they'll just move their money elsewhere at worst.

dr.charlemagne's picture

whats the big deal...................its only paper

SheepDog-One's picture

Only thing that matters is what the next FT rumor half hour before close will be.

DosZap's picture

 Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg?


My opinion, is SNB NEVER intends to stay pegged to the Euro,and folks were betting the same thing.

Plus, they still preferred the CHF, in CASE the Euro implodes, they will will still have the CHF.

They can UnPeg as a fast as they pegged.

learning2's picture

Just wait for the German Mark to come online...TSHF! Buy Physical. The Swiss Franc will be just a memory of a Euro-Stabilizer and Safe Haven.

The Axe's picture

according to the NYT, CNBC, and Morgan   ZH  does not exist, can't be reached. and lives only as a fight club fantasy....and Tyler can't ADD......high praise indeed....  lol 

Mercury's picture
  • If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
  • You Swiss think stablizing trade is worth the inflation risk (you did this on a smaller scale in the 70's) but I think the game this time is preserving wealth.  So, print money if you want to devalue but buy gold and/or other hard assets instead...not Euros.

    And with the understanding that the government will pay Swiss citizens/corporations a fat dividend down the road if need be (like a petro-rich Arab principality).  You'll be pretty rich at that point and you'll be able to afford it.  You can get by on massive (and cheap) imports for a long while until the dust settles.

    Sure this would hurt exports and foreign loans (if the CHF stays flat-->up) but look at what you're risking with this idiocy.

    Remember - your traditional core competency is Fortress Switzerland, not fluffing up the International Brotherhood of Idiot Politicians and Bankers.


    You don't have to go down with this ship.

    Jannn's picture

    rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors rumors 

    Bloodgroove's picture

    I wonder who will get booted off Survivor tonight.  When's the next American Idol?

    Voodoo-economist's picture

    wtf, you use retail broker volume for your "conclusions"??? stop wasting peoples time

    FranSix's picture

    Looks like they have no problem with how much the Euro might rise, but are very cautious on how much the U.S. dollar may firm up.

    OT:  Canadian Housing Bubble

    "Flaherty and Bank of Canada Governor Mark Carney have paid close attention to Vancouver housing prices, and they have warned Canadians not to take on so much debt that they will not be able to service it when interest rates rise. 

    Asked at a news conference in New York what it would take for Canada to act again to cool the market, he said: "It will take clear evidence of a bubble in the housing market in Canada, which we have not seen.""

    The CHF rose greatly on the collapse of the housing bubble in Eastern Europe, because mortgages were priced in francs, and say, not in florints.  Swiss rates went negative before the decision was to peg with the Euro.  Canadian treasury bill rates are actually in decline, not rising, this would lead to a similar scenario as with the Swiss.

    PaperWillBurn's picture

    I said this from the day it was announced. First they peg, then they join

    qussl3's picture

    Simple, threaten to buy gold on the open market with those EURs.

    The FED and ECB would be much more amenable then.

    How people can consider Swizerland a safe haven now when the SNB has openly commited to debasement is beyond me.

    DosZap's picture


    How people can consider Swizerland a safe haven now when the SNB has openly commited to debasement is beyond me


    Because it's temporary..............they will DE PEG at the drop of a hat.

    It simply is a gimmick to get the heat off the VALUE of the CHF for the moment.

    qussl3's picture

    Exactly, its CB shenanigans.

    But it is also a very real devaluation for anyone who panicked into the CHF from EURs.

    Playing games with the store of value excludes it from being considered as such.

    Isotope's picture

    This is an interesting commentary on the ability of central banks to act as absolute monarchs or dictators. Switzerland is known as a model of direct democracy with their referendum process on national laws and policies. Yet I doubt there is any way the Swiss people have any control or possible referendum over this decision to peg the CHF to the Euro. This despite the fact that it will likely have a bigger effect on their lives than anything they are allowed to vote on.

    Pacifico's picture

    That is also the reason CH can't join the Euro as this would require EU membership, which in turn would require a national referendum with majority vote. Given the current state of the EU this is far from happening anytime soon. A peg is the most they can do, however the chances of exiting without major damage from this point on seem to be rather minimal.

    Dingleberry's picture

    As Rothchild said, issuing currency matters. Not issuing laws.

    Schmuck Raker's picture

    At the risk of sounding like a ZH Gold-Bug:

    They could always vote with their money, and buy gold.

    vast-dom's picture


    Schmuck Raker's picture

    Dangerous territory for the SNB.

    More firearms per capita than any other first world country. ;)

    DosZap's picture

    Schmuck Raker

    More firearms per capita than any other first world country. ;)

    Close,we are still #1.( that's assuming the 80 million  plus they know about, it does not include another 20-40 million, they do not.)

    I often wonder WHY they have the highest suicide rate in the world..............??? 

    Schmuck Raker's picture

    I know we've got way more guns per capita, but Switzerland's still a first world country. XD

    DCFusor's picture

    No need to wonder when you're simply wrong.

    They're 23, we're 39 out of 107 listed there, when it comes to suicides (at least those reported officially).

    Isotope's picture

    I seem to remember Benjamin Franklin saying that "nine men in ten are suicides."

    Manthong's picture

    "Voters could be confronted with the choice of either accepting the Euro or eating billions of losses as the SNB will have to be recapitalized."

    Certainly Swiss politicians aren't at all like our politicians, and they could never allow their country's historic independence to be compromised for a socialist agenda, right?  

    Alvaro de Esteban's picture

    I think they are betting for an Euro without PIIGS.

    And that would be a very succesful bet, even to join this "new euro"

    And in case German would left the euro maybe SNB has some "hidden swaps" with the Bundesbank.. Science Fiction is happpening everyday

    Cat On A Ledge's picture

    i believe you have a strong argument here. What the SNB is doing is basically betting on time; ie, that the eurozone crisis can be resolved, or at least contained in some form, before inflation hits home.

    For inflationary risks to materialise, those sold francs must be put to 'work', snapping up assets in Switzerland itself. This takes time, and can be discouraged via legislation if it gets too 'hot'.

    There is another possibility:

    We can also call this a form of QE, for this is similar to what the FED has done, tucking money away in excess bank reserves (except their aim was mainly interests rate not exchange rate). Until those francs are released into the economy, they will not produce any immediate ill effects. If the francs are held by a willing (central bank) accomplice, then inflation risks may be 99% mitigated. If this is the case, then we're witness to the greatest currency manipulation of all time.

    Which accomplice? Not a country in direct competition with Swiss exporters for sure, so probably one that's heavy in EUR assets or CHF liabilities, a mutually beneficial arrangement. Of course, i merely love to speculate.


    edit: Not countries with CHF liabilities, their CBs do not carry large enough balance sheets. So that leaves only the former.

    fyrebird's picture

    Highnoon right here in the US of A:

    Oh, and a pitch for my avatar. A bad girl does some good:

    You want monsters? Anon gots nuth'n.

    faustian bargain's picture

    waitaminnit...did you used to be someone else here?

    PulauHantu29's picture

    The weak SF:USD will thwart all those Swiss who were rumored (by the RE sellers) to flock to Florida to buy all those thousands of foreclosed properties.

    Oh well.

    eddiebe's picture

    Nowhere to run, nowhere to hide....

    Wholeden Caulfield's picture

    What kinda delta they giving the 120 Puts??? $ can u get hurt by selling

    downside crap?

    jmcadg's picture

    Does this mean that both the Swiss Franc and the Euro would be devalued against the Dollar and thus an out of the money CALL Option on the USDCHF or a PUT Option on EURUSD are the best trades to go for?

    Panafrican Funktron Robot's picture

    No.  The dollar is going to continue to heartily compete in the currency devaluation race.  There is no other option.

    americanspirit's picture

    Swiss Spring a-coming. Wait till the Swiss ( all armed) realize they have been snookered by people whose addresses are well known to everybody. The hills will be alive with the sound of bankers begging for mercy.

    LookingWithAmazement's picture

    Lots of alarm. Of course no crisis and SNB bankruptcy will occur. Instead, printing billions of euros to bailout banks with PIIGS bonds, will lead to a MASSIVE RELIEF RALLY on the markets. Because: (a) banks get free money, (b) get rid of their PIIGS crap and (c) the cost (double digit inflation) will fall on the people, not on the banks. What else do bankers and financials want more? Nothing of course! Let's party again!

    Anyway, the euro will eventually rise after the printing and bailouts, the SFR fall. Crisis over by mid-2012. Mark my words: printing = saving.

    brunoaa's picture

    The very loud whisper in switzerland (for what it is worth) is that the market has not yet tested the SNB resolution. So no visible impact so far. 

    RockyRacoon's picture

    ...the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?  In order to discourage speculators,....

    Uh, is it just me, or is issuing puts not speculation?   Are they discouraging themselves?  Wouldn't that be a derivative cubed?

    Sign me:  Ignorant about "economics"

    Ye Ye's picture

    I'm long EUR/CHF and USD/CHF.  Maybe I'll go broke, but I don't see anything stopping the SNB.  I feel like this is a once-in-a-generation opportunity to make money.

    "However, printing too much money will destroy the currency by making it worthless."

    That's the point, right?  Hopefully, Mission Accomplished.

    supermaxedout's picture

    For a German or a Swiss or an Italian or a French investor it is absolutely clear that the ECB and the SNB are cooperating very tightly in this matter. The letter is just a fig leaf. Just to fulfill the expectations from the public because it would be more confusing if the ECB would have not reacted at all.

    Have in mind that the ECB is in Frankfurt only appx 200 miles from Basel the location of the BIS Bank of Intl Settlement. If you drive one hour longer than you have reached Zurich where the SNB is residing.  Euroland and Switzerland are tightly interconnected. To say it simple. They are in the same boat economically. Very much unlike UK.

    So be assured that the SNB gets everything it needs from the ECB in order to reach in the near future an exchange rate between 1,30 and 1,40 CHF for one Euro. This is the rate range which reflects the economic realities when comparing the Swiss and Eurolands economies. 1,30/1,40 is a range the "real economies" of both jurisdictions are not endangered.  This will be the range no matter what "financial markets" expect.  It is matter of survival for Euroland and Switzerland.

    laosuwan's picture

    if you have money you want to keep in cash, for whatever reason, would you rather hold:


    Swiss Francs

    US dollars

    Australia dollars




    I think people will still keep buying Swiss francs as they always have for the same reason people keep buying Windows operating system; because they always have.

    lemondy's picture

    So, where is the explosion?  Month end data, foreign currency reserves:

    Aug 2011 253351 m CHF ~= 226bn EUR  @ 1.1205

    Sep 2011 282352 m CHF ~= 235bn EUR @ 1.201

    so approx a 4% increase in their EUR holdings to defend the peg.



    foofoojin's picture

    ..... agree. this is interesting.  i like bloombergs spin on it.

    "The reserves, calculated according to standards by the International Monetary Fund, jumped to 282.4 billion francs ($305 billion) at the end of September from 253.4 billion francs in the previous month, the Zurich-based Swiss National Bank said on its website today. "

    (282-253)/253 =  0.1146  or a 11.5 percent move. :)

    lemondy's picture

    Yeah.  And next month they devalue by another 10%.  Bloomberg: "SNB foreign currency reserves soar by 10%"