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What’s a Swiss central bank to do?

As has been well documented, the Swiss franc’s relentless rise has been causing no end of headaches.

Swiss exporters, Swiss banks and even Polish and Hungarian mortgage holders have all been affected. The Swiss National Bank, meanwhile, is stuck between a rock and a hard place.

Having intervened unsuccessfully before, it’s understandably cautious about doing so again.

That said there are some additional factors going for it this time around.

As Simon Smith, chief economist at FXPro, observed on Thursday:

The Swiss National Bank has a more substantial reserve armoury now vs. the last time it started on a period of intervention, with reserves nearly 50% of GDP, compared to 10% at the early part of 2009. Furthermore, the SNB has rebalanced these reserves; around 55% being held in euros. It was as high as 70% after the last round of intervention ended in the middle of last year. This does put it in a stronger position than was the case a couple of years ago. But, as always, there is nothing to say that intervention will be successful and, more often than not, unilateral intervention is often a losing battle.

But really, it’s the other options that are more interesting.

One, says Smith, is charging negative rates on overseas Swiss franc holdings. As he explains, there’s even a precendent:

It was done in the seventies, as a way to stop Swiss franc appreciation, but that was in very different economic conditions and financial times. In the current environment, such a move could be seen as a step towards more capital controls and possibly ‘currency wars’. Nevertheless, with default fears prevalent on both sides of the Atlantic and few signs of EU leaders finding a way out of their predicament, it’s not something that should be ruled out as the SNB is likely to find itself pretty powerless otherwise.

Another approach still, meanwhile, is strategically pegging the Swissie against the euro on a permanent basis.

Though that really remains a last resort.

As the SNB’s vice chairman Thomas Jordan noted on Wednesday, a move like that would undermine Switzerland’s autonomy and would not go down well in the notoriously independent nation at all.

For now, it seems, all extreme options remain open.

Related links:
Swiss franc intervention cost a billion a day in April
– FT Alphaville
The Swiss National Bank of Poland (and other CEE countries)
– FT Alphaville

This entry was posted by Izabella Kaminska on Thursday, July 14th, 2011 at 19:00 and is filed under Capital markets. Tagged with , , , , . Edit this entry.

The pain of a strong currency. Eurchf is off the chart & shows no sign of stopping. Some respite for the usdchf but both are still pointing sharply lower.