Guest Post: SNB Buys Swiss Francs And Sells Euro: Welcome To The EUR/CHF Peg

Tyler Durden's picture

Submitted by George Dorgan

SNB buys Swiss Francs and sells Euro: Welcome to the EUR/CHF peg

Why the big Q1 loss of the SNB was actually a big win for the central bank

Anybody watching the EUR/CHF exchange rate this year was wondering why the volatility the pair saw last year had completely left. The pair slowly fell from 1.2156 over 1.2040 at the end of Q1 to 1.2014 today. FX traders hoped on a hike of the floor from 1.20 to 1.25, as many Swiss politicians and companies requested. Banks sold masses of Long EUR/CHF certificates and options. The retail market measured in SSI (Speculative Sentiment Index) was 96% long EUR/CHF. 

We saw the typical Forex web sites telling regularly their masses of followers that the protagonists of these web sites were going long EUR/CHF in the hope that the SNB is going to act. This happened at multiple critical levels, at 1.2070, 1.2050, at 1.2030 and finally at 1.2010. The small FX trader was begging for months that the SNB would finally intervene.

When all these people were long EUR/CHF, who was actually short, when the exchange rate continued to fall ? We speculated that some big accounts wanted their clients to be knocked out with their EUR/CHF longs, we thought that Swiss pension funds and big investors continued to repatriate their foreign funds

What did the SNB ? Did they support the hopes of the masses, of all these SNB rooters ?

Yes, psychologically they did. For months they continued to vow that they might take further measures to weaken the franc, even if wording changed from the "massively overvalued franc" in August 2011 over "significantly overvalued franc" in January 2012 to "overvalued franc" recently.

But on the back-door of all this rhetoric they did the complete opposite: The central bank was happy to get rid of their Euros at a higher price than the floor they had set in September 2011 !

Unfortunately for the SNB, it is a public company and must reveal their balance sheet quarterly and could not continue this strategy: The Q1 balance sheet has revealed that the SNB had reduced their Euro holding from 57% in Q4/2011 to 50% of the reserves in Q1/2012, a decrease of 17 bln. Euros. The central bank managed to further reduce the balance sheet: The foreign currency reserves fell from 305 bln. francs in Q3/2011 to 245 bln. in Q1/2012. They managed to further reduce the money supply, measured in "sight deposits from domestic banks" from 202 bln. CHF in Q/2011 to 157 bln. in Q1/2012. Instead of continuing to provide cheap money to banks and to fuel the Swiss real estate bubble the SNB decided to increase its liabilities with the Swiss state from 5.6 bln. in Q4/2011 to 12.5 bln. CHF in Q1/2012.

The reduction of the balance sheet also means that the central bank can start borrowing again from banks and increase the fire power when it is really time to defend the 1.20 floor. Moreover it becomes clear that any thoughts about a hike of the floor are just rumors, when even the SNB itself buys Swiss francs and sells euros. 

Sure, selling Euros at an average of 1.2079 in the first quarter, was certainly a loss game for the SNB compared with the 1.2167 at the end of Q4/2011 (average value in Q1 computed e.g. here), but sometimes they picked the tops of 1.21 and more for example at the latest SNB "marketing" event, when the Forex crowds were speculating on a hike of the floor. Additional euro-denominated losses came from price changes in the German Bunds, the main SNB euro position: 10 year Bund prices fell from 139.12 on Dec 30th to 138.03 on March 31st.

Moreover the Japanese yen, 8% of the Swiss foreign currency reserves, lost over 11 percent of its value in Q1: The CHF/JPY rose from nearly 82 to 92 during the first quarter. Last but not least the central bank increased their holdings in British pounds from 4.2% to 8.5%, a change which is partially due to the rising pound. In total the SNB had a loss of 1.7 bln. francs in the first quarter.

But if we look at current prices for these assets it becomes clear that the SNB will have a very positive quarter in Q2/2012, if current market conditions do not change.

1) 10 year German Bunds have risen from 138 to 141 since the end of March.
2) The CHF/JPY has fallen from 92 to 89.
3) The GBP/CHF continues to appreciate from 1.4444 to 1.47 since the first quarter.

Two things, however, should be clear: anybody who has hoped on a hike of the EUR/CHF was trading not with but against the SNB. The central bank will consider a floor hike only in a strongly recessionary and deflationary scenario. On the other side the SNB has increased its firepower and its reputation: breaking the floor will be very difficult for the next 2 years.

The result: a EUR/CHF peg at 1.20

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Buck Johnson's picture

The creature is just under the murky water and we don't know where it will come out at. 

Zero Govt's picture

we can hazard a guess that if it's a meat-eater and we're on the menu it'll be in our vicinity

watch out productive people everywhere

...better still don't sit their like turkeys, hit the parasites before they rob/ruin you

Stop Paying Your Taxes ...don't feed/fund the parasites

ilion's picture

The CEO of my Forex broker Armada Markets wrote a piece about EUR/CHF and where it's all gonna end.

Most of the retail crowd has been building up massive long positions in EUR/CHF, we all know where this leads us. I'm short EUR/CHF all the way since 1.21 .

ISEEIT's picture

Watch 1.30 (EUR/USD) I see that as a hard floor with 1.32 set more as a floor with safety. Between 1.3050 and 1.3250 you can kill it.

Fuck the Swiss. They make me jealous:)

DeadFred's picture

Someone with a lot of oomph has been defending 1.30

LongSoupLine's picture

Hmmmm, who is in the market these days with a lot of "oomph"?

(hint: they ARE the market, and their name rhymes with "rental tank")

Good luck guessing this stumping riddle.

Yen Cross's picture

 SMOOTH one Tyler!   Iv'e[sic], held that position, since last " November",...

barliman's picture


I've gone in search of the reclusive Bruce Krasting ...

... he is likely to be nursing his wounds over having called the SNB peg as a historically dumb move last August.

I shall have to move carefully lest he feel cornered by my repeated admonitions to him that thinking the Swiss make dumb money moves was a potentially fatal mistake, as history has often proved.

I am going to lay out a nice brie, a decentish Sonoma Chardonnay and the latest report of the Board of Governors of the Social Security Administration.



Yen Cross's picture

 My Retail Friends will drive that " Swissy" NORTH 5 handles!

Zero Govt's picture

Barliman,  this peg is costing the SNB approx €1-2bn per Quarter in reserves i believe don't think that's dumb?

barliman's picture



The point of the entire article above is the Swiss have been making money off the peg by selling, at appropriate times, both the CHF and the Euro, as well as reducing the foreign currency reserves in a profitable manner thereby increasing their ability to defend the peg.

I have stated before (~ 8 months ago & since) that the Swiss peg was their response to Ben "Beggar Thy Neighbor" Bernanke's policy attempts to turn the CHF into a "safe haven" currency that would appreciate while the dollar devalued and the Obambi administration's attempts to extort the Swiss banks out of the 'secret, numbered account business'.

I count this as a successful Fuck You move on the part of the Swiss ... so , no, I don't consider this a dumb move. 

Washington is overrun with idiots who have created a critical mass of stupidity sufficient to form a Black Hole of Stupidity that overwhelms any intelligent thought within the Beltway.


cbaba's picture

I totally agree with you Barliman.

This was a response to Bernankestein. And not only Swiss everybody is doing the same.

Swiss/Euro pegged to euro at 1.2, Euro/Usd almost pegged in the band 1.30-1.34 , Euro/Cad pegged at 1.3, Chinese Yuan/Usd to 0.16

Basically the other central banks are saying to Us that you cannot solve your problems by devaluing the US dollar, we will do the same..

Everybody will be busy printing their fiat currencies month after month, At the end only Gold and Silver will win.


Badabing's picture

"Everybody will be busy printing their fiat currencies month after month, At the end only Gold and Silver will win"

Not today!

what's up with that?

well below the 4 year trend of 17% true inflation, it's a give away right now.

Ghordius's picture

I agree with Barliman. Remember that the concepts of costs, illiquidity and insolvency don't apply to Central Banks in the same way as to the rest of the financial world (until you kill a currency Zimbabwe-style).

In this current environment, when the SNB is having costs, it's winning.

Yen Cross's picture

 Every Time I set a trailing stop? The Damn thing gets hit!

  What happened to res/sup?

barliman's picture


Algos are not you're friends

They are sapient enough to take out every form of static defensive manuever the average player can set.

Colocated servers with your own algos are your best defense ... but pricey.


MoreNails's picture

IMHO SNB might be buying CHF for three reasons:

1. As well explained here, to have more power to defend the floor.

2. To enable big money, long-standing partners, or just guys with power that would be pissed to lose because of SNB's actions, to get out.

3. From a technical standpoint, to get negative carry on the EUR/CHF pair, you have to buy CHF forwards. If they want to disgust all EUR/CHF longs, that's what they would do... although doing that (buying CHF at 1.19 in one year's time, for ex., while holding the floor), is a money-losing stance, they have "lost" so much already, that it might be one of their strategies.

Who knows !