The Swiss National Bank (SNB) intervened in support of its 1.2000 currency peg against the Euro to the tune of CHF 60 billion ($66B) in the month of May. The vast majority of this intervention occurred during European trading hours. That means that the SNB bought, on average, the equivalent of $7mm worth of Euros every minute during the month. That’s a staggering number to me.
I was aware that there was ongoing intervention. I thought it would end up being a big number. At one point late in the month I was advised that a big American bank dropped Euro 7B on the SNB in a single ticket (think Cetacea). But I’m blown out by the 28% increase in reserves in a single month.
The SNB was clearly concerned with its rapidly growing holdings of Euros. In an effort to diversify its newly acquired Euro reserves it sold Euro 25B and bought dollars, Yen, Sterling and the Canadian and Aussie dollar.
The Japanese must be pissed at the Swiss action. The last thing Japan needs is a stronger Yen, the SNB added to Japan's problems in the month.
I wonder what the folks at the ECB are thinking about this. On one hand, a cheaper Euro is helpful to the Euro economies. But not if the adjustment takes place too quickly. The 8% deterioration in the Euro in May added to the instability in the debt markets of Europe. The Euro weakness was the shining example of all of the European problems. My guess is that the deciders in Brussels and Berlin are angry at the Swiss for trashing their currency at a very bad time. The SNB could have waited a month or two to diversify its holdings in an effort to avoid more market turmoil. But they chose to blast an already unstable market with very big supply.
I would suggest that the policy of diversification has added to the amount of Euros that the SNB had to buy in the EURCHF market. Every day that the EURUSD got weaker, it added to the demand for the Swiss Franc. I believe that the SNB contributed to the global market instability that occurred in May. It’s impossible to avoid the conclusion that the policy actions were a failure.
The question of the hour is, “Can the SNB continue to intervene at this pace?”
My answer to this is, “Absolutely not”. The risks to the country of accumulating reserves at this rate are very high.
I have to believe that the US Fed/Treasury, the Bank of Japan and the ECB have been making calls to the SNB and the President of Switzerland to lay off the intervention and the diversification. The only option left for the Swiss is exchange controls. They will make it very expensive to own Swiss Francs. Negative interest rates (currently -75BP for two months) will get more negative. Reserves will be applied to FX positions and there will be restrictions/taxes on any new money coming into the country.
In my opinion the odds for exchange controls to be established in Switzerland this weekend are very high. If it is not this weekend, it will be before the end of the month.
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Note:
I was on Swiss radio this week discussing the dilemma the SNB is faced with. I did not make any new friends with the interview. I contrasted the 54% of youth unemployment in Spain to the 3% rate that exists in Switzerland. The announcer remarked that this huge difference was a result of the Swiss managing their economy much better than the Spaniards. I responded that the results are a function of currency manipulation. I don’t think I will be invited back. My rant (link [11]).
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