15 January 2015
Guy Foster – Head of Group Research
The Swiss franc over recent decades could usefully be characterised as a victim of its own success. The currency has continued to be seen as a safe haven to the extent that it’s strength has threatened Switzerland’s price stability (risking deflation) and export competitiveness. To alleviate the impact the Swiss National Bank has been fighting an ongoing battle to maintain export competitiveness with the euro including the fabled floor of 1.20 CHF per euro. Maintaining that peg has cost the Swiss central bank many hundreds of billions of CHF but this currency has been “printed” and so hardly represents a cost at all.
What is the downside to accumulating foreign exchange reserves? In notional terms we can see this as an impoverishment of your own citizenry. Beyond which it requires the accumulation of substantial reserves of overseas assets. Some had wondered whether Switzerland would establish a sovereign wealth fund – its currency reserves are a little over €500bn just a little smaller than one of China’s two currency sovereign wealth funds.
It seems to us that the SNB was not happy to be adding to its holdings of negative-yielding euro assets ahead of the announcement of QE. That could be due to the loss of carry. The SNB would have been forced to buy longer duration and/or lower quality assets in order to maintain the peg. With political dysfunction in Greece (and arguably Italy), negative deposits rates and the prospect of competing with the ECB to buy assets the SNB have clearly felt there was plenty to lose from maintaining the peg. Instead they have tried to experiment with a sharply negative policy rate which should lead to outflows once alternative homes can be found for the money.
-ENDS-
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