How Long Until EURCHF Is Re-Pegged To 1.10?

Tyler Durden's picture

Swiss National Bank currency reserves just topped CHF300bn in May for the first time on record. As SocGen notes this jump from a mere CHF66bn in April is the second largest rise since August last year - right before the SNB put in place the 1.20 cap in EURCHF. The increase in reserves is not a major surprise after EURUSD plummeted over eight big figures last month and the SNB was left with no choice but to step up its EUR purchases in order to defend the cap. However, the size of the increase may cause fresh political consternation as the cost of unlimited foreign currency purchases continues to climb and a definitive resolution of the euro crisis is still remote. What worries us more is the market's 'hedging' of a tail-risk event in Europe has driven risk-reversals in EURCHF (a way of understanding the bullish/bearish bias in FX options prices) that implies a 1.10 level for EURCHF which is somewhat incredibly supported by an analysis of the variation in ECB and SNB balance sheet changes. As the threat of capital controls looms large and Swiss 2Y rates press back towards -30bps, we wonder how long until a new 'equilibrium' cap is adjusted down to 1.10.

The relative change in the size of ECB and SNB balance sheet reserves (black below) appears to be leveling off around an implied 1.10 EURCHF level...


which is also implied by the EURCHF FX Option market (risk-reversals - black line)...


and given the historical dependence between EURCHF and Swiss 2Y rates (black line below), it would appear that even the rates market is screaming for a 1.10 peg...

One wonders how Goldman's inveterate BRIC-bull Jim O'Neill is feeling about his Top FX trade of 2012 of repegging the rate to 1.25 - or perhaps it is yet more of the same Muppet-Mauling - as he is selling EURCHF to all those, very few, left out there who do what Goldman says and not what it does...


Charts: Bloomberg

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
BlandJoe24's picture

Trying to understand the significance of the EURCHF peg.  What is its purpose and why is it so important?  What are the likely FX (EURUSD specifically) and other Eurozone financial (sovereign bond rates, etc) and political consequences if peg gets adjusted to 1.10?

Buckaroo Banzai's picture

The swiss do most of their trading with the euro-zone. A strong CHF cripples swiss exports to the euro-zone. Political consequences are obvious-- powerful swiss exporters put increasing pressure on their politicians as the CHF strengthens relative to EUR.

I remember in 1985 when a dollar bought 2.15 swiss francs. Switzerland was expensive even at that rate.

Ghordius's picture

not long ago the Swiss exporting/tourist industries were asking to go back to 1.40 for an EUR.

I'd be very astonished* if Jordan and the other two would even think about "blinking" at the moment... It's a question of will, not firepower.

(*here I'm talking my book, too)

Ghordius's picture

Western, are you trying to annoy me or just trolling? How about Swiss Newspapers, public statements of Swiss politicians, etc. etc.?

diana_in_spain's picture

Daniel Estulin, the author of the book "club Bilderberg" says it has been decided in the bilderberg meeting to sacrifice spain .

what do you guys think of that?

LULZBank's picture

The "sacrifice" would probably be ritualistic (read: financial) secret (read: only for insiders benefit) and the common sheeple would'nt get much feel for it.

diana_in_spain's picture

But he also says they will allow one major spanish bank to fail (maybe Santander) he says it here in spanish on a major financial tv station

LULZBank's picture

But he also says they will allow one major spanish bank to fail

I could tell you that, even without attending the Bilderbergs meeting.

Ghordius's picture

if you compare the lists of the attendees of the various Bilderberg meetings since 1954 you'll notice that in the sum the guests are getting less and less important and the journalists more and more numerous.

it's anyway a debate club, not a decision-making conference.

Further, Estulin has an agenda: he wants Spain to leave the euro. note how he paints the "mistreatment" of the Spanish, even with words like "little girl".


LULZBank's picture

Precisely, when you are having "moles" and so many journalists pre warned of such events, then it means it has lost its "credibility" and just a show now for the wannabes.

It would have had relevance, if it was still taken as a conspiracy theory. Its almost mainstream now.

Buckaroo Banzai's picture

It's foolish to assume anything about the Bilderbergers. The fact that more journalists are included now (sworn to secrecy of course) simply reflects the increasingly important role the MSM propaganda complex plays in keeping these people in power and effectively controlling the masses.

Non Passaran's picture

Gee, journalists sworn to secrecy (to a group of people without any ability to hold them to that). And WTF would a paper send a journalist to such gathering if they can't report about it? Also, if they are sworn to secrecy and don't report it, how are they controlling the masses? (Let alone the fact that MSM are nowadays reaching ever fewer people).

What a bunch of BS...

Ghordius's picture

it's a powerful argument for a conspiracy theory. though if you put it in those terms, what is hindering even more powerful forces to feed carefully crafted half-lies to this second-tier "secrecy sworn group"? then, the MSM presence is just an optimization of a propaganda channel...

I think it's important to remember that the secrecy applies to "who said it", not on "what was said".

In the old times, the old crew would meet and craft little arms deals (like those of the Dutch Hercules scandal), that was before the US Security-Industrial Complex got greedy...

Western's picture

Where do you get your paycheques from, sir?

Ghordius's picture

nope, I write paycheques to authors of journalistic articles about facts and opinions that are important to me

not much (though I'd bet you would be astonished how cheap it is), see it as a hobby, coming from a sense of civic duty

LULZBank's picture

Gold & Silver would be a bit more cheaper in CHF then.

PontifexMaximus's picture

This is for sure as the amen in the church. Jordan seems to have no other choice but the political support is vanishing. Would be probably a joke worth to pick up 5 to 6 big european
stakes of DAX, CAC and ftse MIB companies, talking about 10 to 15 bill. lots. You get Generali as a whole and Siemens up to 15 %, what else to do with all this worth....... Euros?

SDRII's picture

At least we can take comfort in knowing that Geither is now injecting himself into the Syria policy.

Welcoming other countries' views about additional sanctions that would be effective, Clinton urged Syria to comply with all its commitments under the peace plan proposed by UN-Arab League joint envoy Kofi Annan, and allow the political transition to begin.

The second meeting of the Friends of the Syrian People International Working Group on sanctions is held here in Washington on Wednesday. The one-day event drew representatives from 55 nations.

In a prepared speech before the meeting, U.S. Treasury Secretary Timothy Geithner called for tougher sanctions against Syria to hasten political change in the Arab country.

Geithner, in his speech, even went as far as opening up the possibility, if necessary, of the Chapter 7 action in the U.N. Security Council, which authorize actions including the use of military force.

Responding to the reference of the "Chapter 7 action," White House spokesman Jay Carney told reporters on Wednesday that all options are on the table and the "need to take urgent action" is on the minds of policy-makers in the Obama administration and at the UN, although he did not specify on the potential actions.


lsbumblebee's picture

Geithner isn't the first treasury secretary to stick his nose where it doesn't belong.

Read about the Morgentheau Plan. FDR's treasury secretary Henry Morgentheau and his fellow Jew Harry Dexter White's sadistic idea was to starve the German population following World War II by destroying its industrial infrastructure and leaving it a wasteland. White was later suspected to be a Communist spy and died of a heart attack before he was scheduled to testify before the House Un-American Activities Committee.


katchum's picture

The SNB balance sheet contains less Euro reserves though as of late.

bugs_'s picture

We'd have to check with the central bankers' inside trader wives to get the scoop on that re-peg

Urban Redneck's picture

Welcome to the new normal - CB's running for-profit F/X Hedge Funds.  To understand the strategy you have to look at both the size and composition of the balance sheet and keep in mind that even a half-witted banker knows how to apply lipstick to the pig just in time for COB on disclosure day.  Since (profitably) front running their own imposition of any currency controls is a given, do they waste that bullet now, or bide their time and wait for the big sloshing in the EURUSD bathtub, and save that gimmick for the next go-round?