[LONDON] Switzerland's interventionist central bank is using the window of opportunity created by a summer lull in global currency markets to push down the value of the Swiss franc with less effort and at lower cost.
Data and price action support the view among traders that the Swiss National Bank has made several such moves in recent weeks.
The franc is hovering near four-month lows against the euro and hit a more than three-month low versus the dollar this week, with the options market suggesting the bias for bets in favour of further gains in the franc, especially against the single currency, is gradually waning.
Data from the SNB on Monday suggested it had intervened last week, right in the middle of the traditional lull in July and August, when asset managers and traders go on holiday and volumes are at least 10-15 per cent lower than the average US$5 trillion a day.
Currency moves tend to be larger in a less liquid market, increasing the chances of the SNB's efforts bearing fruit. "In thin volumes, they are the big guys," said Peter Rosenstreich, chief FX analyst at Swissquote Bank, Geneva. "They are trying to get the exchange rate away from the levels they are uncomfortable with, while the (SNB's balance sheet) losses are not large at the same time."
The SNB, one of the few major central banks that invests in stocks including Apple shares, posted a record loss of 50.1 billion Swiss francs (US$51.8 billion) in the first half as it stepped up its purchases of euros, whose value has fallen during the 1-trillion-euro asset purchase programme the European Central Bank kicked off in March.
The huge loss prompted the SNB to warn its shareholders, which include the federal government and regional cantons, that it may mot be able to maintain its regular dividend payout policy, drawing criticism within the country.
Given the losses and the fact that the SNB's balance sheet has ballooned to more than 85 per cent of gross domestic product, analysts do not expect the SNB to be very aggressive with its current phase of interventions.
"That does not rule out some modest and passive intervention but we see this as a holding exercise until broad dollar strength takes dollar/Swiss franc back above parity - and helps to soften the trade-weighted franc," said Chris Turner, head of currency strategy at ING.
Having stunned global markets in January by abandoning the franc's 1.20 per euro cap it had defended since 2011, the SNB has since intervened in fits and starts.
Its presence prevented the franc from hitting parity against the euro during the height of the Greek debt crisis. The pressure was so acute that the SNB issued an unusual public confirmation that it had intervened to weaken the currency.
International Monetary Fund data suggests the SNB may have been the only major central bank buying euros in the first quarter of the year, a time when others were cutting their exposure.
Of late, though, with the Greek crisis slightly less acute and deflation risk increasing in Switzerland, investors have been cutting exposure to the franc.
Elsa Lignos, a senior currency strategist at RBC Capital, recommended investors to bet on long-term euro appreciation against the Swiss franc via currency options.
"Part of its reasoning for abandoning the floor was to allow room for further balance sheet expansion in extreme circumstances," Mr Lignos said. "We think the time is right to reposition in the euro/Swiss franc pair."