Zero Hedge's own Bruce Krasting has an excellent piece ("The Swiss Did It?") from last week, commenting on the interventionist bent the Schweizerische Nationalbank or Swiss National Bank (hereinafter the central bank of Switzerland or the "SNB") has been demonstrating in the face of the recent crisis. Of course, this particular behavior is not at all new on the part of the SNB, but it bears examining in a bit more depth why and how Switzerland's monetary authority acts in the face of global crisis.
One must first understand that at CHF 1.36 trillion[fn]UBS quarterly report, 1Q2010 (May 4, 2010).[/fn] and CHF 1.07 trillion[fn]Credit Suisse quarterly report, 1Q2010 (April 22, 2010).[/fn] respectively, UBS and Credit Suisse represent over 500% of Switzerland's entire 2009 GDP.
Moreover, it is important to understand that in the years leading up to 2008, Swiss banks shamelessly pressed the carry trade into Eastern Europe, prompting Austrians, Poles, and Czech borrowers to denominate their mortgages in Swiss Franc to take advantage of absurdly low interest rates. Of course, any appreciation of the Franc vis-a-vis the Euro would have the effect of blowing out the monthly payments on these mortgages.
Consider also that Switzerland has both a significant export economy and takes in a great deal of tourism money, to the point where the vestiges of the national airline, now "Swiss," are effectively subsidized to consistently present cheap fares into Switzerland and bring in hard (or formerly hard) foreign currency.
Against this backdrop, and mindful of the ability of the potential impact a failure (or credibility gap) in one of these large, Swiss banking institutions to crater the entire Swiss economy, and assuming that Swiss banks have not materially unwound these instruments since 2008, the motivations of the SNB become clear. Prevent appreciation of the Swiss Franc at all costs. As it happens, and in an interesting divergence from the postmodernish and enigmatic norm in monetary public relations doctrines, they appear quite prepared not only to do this, but to publicly tout their resolve. Consider, for example, the crude thrust of this speech by Phillipp M. Hildebrand of the SNB at Universität St. Gallen on January 21, 2009:
Mit einem Kurzfristzins von praktisch Null kann die Nationalbank einer erneuten Aufwertung des Schweizer Frankens nicht mehr durch eine Zinssenkung entgegen wirken. Bei Bedarf müssen andere Instrumente eingesetzt werden, um eine erneute Aufwertung des Frankens zu verhindern oder sogar eine Abwertung herbeizuführen. Grundsätzlich gilt, dass eine Zentralbank immer in der Lage ist, die absolute Menge der sich im Umlauf befindenden eigenen Währung zu erhöhen. Die Nationalbank kann beispielsweise unbegrenzt Schweizer Franken gegen ausländische Währung verkaufen. Im Extremfall, kann sie sich gleichzeitig verpflichten, zu einem festgelegten Wechselkurs unbegrenzt Devisen zu kaufen.
With a short-term rate of practically zero, the SNB can no longer prevent an appreciation of the Swiss Franc with interest rate cuts. If needed, other instruments must be used to avoid appreciation, or depreciation of the Franc. As a general matter, a central bank is always in a position to increase the absolute amount of its currency in circulation. The SNB can, for example, sell unlimited Swiss Franc against foreign currencies. In extreme cases, it can commit to buying unlimited currencies at fixed exchange rates.[fn]"The SNB’s Ability to Act in the Crisis," Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, Universität St. Gallen, (January 21, 2009).[/fn] (Emphasis ours).
Hildebrand was back in full force the month before last, again at the Universität St. Gallen, his favorite venue for aggressive policy illumination. (Astute Zero Hedge readers may wish to begin shorting the Swiss Franc vis-a-vis the Euro whenever Hilderbrand is scheduled to speak at the University).
Die Nationalbank wird nicht zulassen, dass über eine solche Aufwertung sich in der Schweiz ein Deflationsrisiko materialisiert. Deshalb werden wir einer übermässigen Aufwertung des Frankens entschieden entgegenwirken.
The SNB will not permit an appreciation of such magnitude that a deflation risk materializes in Switzerland. Therefore we will decisively counter an excessive appreciation of the Swiss Franc.[fn]"The Swiss National Bank’s Monetary Policy Strategy in the Financial Crisis," Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank University of St. Gallen (March 23, 2010).[/fn]
Just last week, SNB Board Member Jean-Pierre Danthine was heard to quip:
Theoretically there is no limit to forex intervention.
Danthine meant intervention to devalue the Franc, of course, as there is a practical limit to defending the currency in the form of non Franc reserves that can be spent doing it, but the point remains with respect to appreciation. One expects, for example, that, in the course of its interventions, the SNB has managed to amass a rather substantial hoard of foreign reserves. Particularly USD and EUR. One further expects the central bank should be able to buy quite a sum of CHF when it feels itself ready to do so.
One of the joys of Swiss Fed Watching is the close matchup between extreme threats (when have you ever heard another central bank willing to repeatedly threaten an unlimited printing press run?) and action. Swiss intervention has been quick, brutal and effective, and has been so since 2008 or 2009. There are signs, however, that more recent interventions lack the enduring effect they commanded in past, however.
A series of suspected interventions, some since confirmed, paint an interesting series of pictures:
Four apparent interventions after the Lehman crash appear in late November of 2008, March of 2009, late June of 2009, and this month. Several other price moves appear suspicious. Two other behaviors suggest either a dramatic psychological effect on traders after the intervention, or continued low level dilution by the SNB. In the period beginning July 2009, following two apparent interventions in March and June which appear to attempt to establish 1.51 as a EUR/CHF floor, the EUR/CHF drifted near horizontal for nearly five months near this floor before beginning another steady decline at the end of the first quarter. AUD/CHF is shown as a rough metric for FX risk aversion (as the unwind of AUD carry trades tends to represent a good barometer for such sentiment). [Source: Bloomberg]
Despite the valiant efforts of the SNB in positioning itself as the European Central Bank of China, one can easily see the writing on the wall for the Euro vis-a-vis the Swiss Franc. Interventions appear to have less effect as time passes and the Euro crisis grows more extreme. This is easily visible if one examines USD/CHF - EUR/CHF spreads:
It seems quite obvious that the SNB has entirely abandoned any efforts (as were rumored) at USD/CHF intervention, and the spread has narrowed considerably, primarily on USD appreciation vis-a-vis the Franc. Likewise, the divergence in direction between USD/CHF and USD/EUR that emerged early this year demonstrates what might fairly be called "panic flight" from the Euro. [Source: Bloomberg]
The SNB could, theoretically, fight a panic run on the Euro of any size, provided it was willing to endure the pain a full-fledged Bernanke style printing program would later create. It seems, however, that the SNB might recognize the damage created by single handedly fighting off market sentiment on the likelihood of a rag-tag parliament of European leaders pulling the Euro together when at least a third of the seats are commanded by the Club Med nations is simply not worth it. Still, a few interventions here and there (and increasingly after hours) might at least slow the speed of descent.