Via Citi's Stephen Englander,
Why did SNB move?
The SNB viewed expected global policy divergence to have a more sustained and growing significance and that this would make maintaining the EURCHF floor more difficult. While there seems theoretically no ceiling on balance sheet growth, the costs of maintaining a policy growing assets 2bn CHF a day for potentially the next few years was unpalatable and did not outweigh the costs to growth for the risks they create shortfalls later.
Also the interest rate differentials that were in place. However large they look by conventional standards as a deterrent to long CHF positions, they have little impact when here is a fear of a jump move in currencies, Grexit or intense capital outflows from Russia or elsewhere.
How big a hit on reserves?
By our calculation the FX reserves portfolio on FX alone will have lost in the region of 60bn CHF, assuming EURCHF at 1.03 and USDCHF at 0.88. Though some of this is likely to have gained on bond holdings, as per our above example, this would be far outweighed by losses on FX.
From here, winding down the portfolio seems a fairly significant policy mistake and would probably only take place if the SNB can find a large pool of CHF sellers and EUR buyers – they now face the same issue that Asian reserve managers face when they diversify. The periods of time that they want to sell EUR is the period of time when everyone else wants to, so their actions just add fuel to the fire. This is because the SNB’s role and responsibility is for protecting the price outlook which by winding down the portfolio would get worse.
Is the strategy to drop peg forever or get the market short and restore peg?
This is a tricky question. There were a lot of lazy EURCHF longs and it was difficult to put on short EURCHF positions through options, so there was little likelihood that investors were positioned for this. The SNB may want to create a two-way market by raising the possibility that a peg would be restored. Unless they outright say ‘never, never’ which would mean ‘probably not immediately’ they may want that kind of speculation to be in place, and leave open the possibility of acting.
What does it say about ECB, Greek election, capital flight into Switzerland?
They may be seeing signs already that these are ramping up. Otherwise the incentive would have been to wait and see whether events transpired as negatively as they feared. It is unlikely we think that the ECB has tipped off the SNB in any formal way, but it is possible that they inferred from informal conversations which way the wind was blowing. The proximate driver of the move was likely the trends they were seeing in CHF buying, but they may have an underlying view that nothing was going to get better quickly from the point of view of the peg.
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