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SNB bite proving worse than bark with investors kept on toes
[ZURICH] Half a year after roiling markets and putting his credibility on the line, Swiss National Bank President Thomas Jordan's approach to keep markets guessing seems to be working for now.
Mr Jordan's strategy of interventions and negative interest rates since dropping a key measure has held the franc in a steady range below parity with the euro, prevailing against ever-mounting pressure on the single currency from Greece's debt crisis.
With the world's major central banks telegraphing their every move, the SNB's surprise decision to scrap its currency ceiling was a wake-up call for markets. While the reversal of a policy endorsed just days earlier initially prompted concerns investors would become wary of heeding Swiss officials' words, that's not proved the case.
"This new strategy is working," said Julien Manceaux, a senior economist at ING in Brussels. "While the move to give up the cap surprised everyone in January and raised the questions whether it was a good decision or not - we can say credibility is restored, if ever it was lost." After 40 months of pledging to defend its 1.20 per euro minimum exchange rate with "utmost determination," the SNB stunned markets by abandoning it, triggering hundreds of millions of dollars in losses at banks and hedge funds.
The switch has proved less costly for the SNB even with the mounting Greek turmoil. Its foreign currency reserves have risen just 4 per cent this year. That compares with a 7 per cent jump in the last quarter of 2014.
Mr Jordan has indicated that keeping the rate would have been a lot more costly, saying in March that it could "only have been at the expense of an uncontrollable expansion of the SNB balance sheet." In a Swiss newspaper poll published on Sunday, 27 per cent of respondents said the SNB's credibility suffered because of the franc-cap decision. Three-quarters opposed reintroduction of a ceiling, even as the stronger currency hurts the economy. The franc was at 1.04581 per euro at 8.05 am on Tuesday in Zurich.
"Loss of credibility is the wrong word," said Kit Juckes, global strategist at Societe Generale SA in London, citing Britain's withdrawal from the European Exchange-Rate Mechanism in 1992, which caused a seismic currency market shock but eventually led to years of better economic growth.
"I don't think a central bank loses credibility by having a currency that's really strong."
Not everyone agrees. Pierin Vincenz, the head of Swiss mortgage-lender Raiffeisen, said he's not convinced of the SNB's policy as it's failed to weaken the franc, according to an interview with Schweiz am Sonntag.
While among major central banks, notably the Bank of England, the post financial crisis trend has been toward using predictable and transparent statements to guide investors' expectations, several institutions, including Sweden's Riksbank, have resorted to ad-hoc communication in recent months.
Economist Nick Kounis at ABN Amro says that policy pronouncements can give investors a "false sense of security."
"Ultimately every kind of guidance is conditional," he said. "If the facts change, the policy changes, and no amount of pre-guidance is going to change the fact that a central banker is not going to take the wrong decision just because they said they wouldn't change policy."
For the SNB, dropping the cap has put pressure on the economy which probably entered into its first recession in five years, according to Bloomberg's most recent monthly survey. Prices are forecast to drop the most in five decades this year.
"The economy has cooled, but you can't say Switzerland faces an economic crisis," said Alessandro Bee at Sarasin. He says the SNB's credibility has taken a hit and its ability to weaken the franc simply by issuing threats has been affected. "Any announcement the SNB makes is going to be questioned." With the cap gone, the franc has appreciated about 15 per cent, a particular blow to exporters. Still, thanks to interventions and a deposit rate of minus 0.75 per cent, the SNB has succeeded in drawing a line in the sand, with the franc averaging 1.046 per euro since Jan 15.
While Greece's debt crisis isn't yet resolved, Mr Jordan expects the franc to weaken over time. Currency strategists see it at 1.06 per euro in the fourth quarter, according to a median of analysts' predictions compiled by Bloomberg.
While the cap is gone, the SNB president has shown a willingness to deliver on threats, including the refrain of SNB policy makers that they would intervene if necessary. Jordan confirmed late last month the SNB sold francs amid a breakdown in Greek talks that fueled demand for the Swiss currency.
"If you get hit once it really hurts," Julius Baer Chief Economist Janwillem Acket said of the effect on investors of the SNB's cap exit. "But if you get hit several times in a series, you adjust. It's like at the dentist."