Bloomberg News

SNB Franc Action an ‘Endurance Race’ With Traders: Comments

September 06, 2011

(Adds Goldman Sachs, Bank of Tokyo from 14th paragraph.)

Sept. 6 (Bloomberg) -- Strategists comment on the Swiss National Bank’s announcement today that it would set a minimum rate for the franc against the euro and would act to achieve “a substantial and sustained weakening” of the currency.

The comments were collected from investor reports.

Paul Mackel, a senior currency analyst at HSBC Holdings Plc in Hong Kong:

“The SNB’s move today is somewhat sudden and aggressive. However, it needs to be aggressive to turn the tide for the franc and to take the shine off its safe-haven status. So, this is an endurance contest whereby the SNB needs to fight hard against a market that could soon test its resolve.

‘‘Putting euro-franc at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place.’’

Geoffrey Yu, a foreign-exchange strategist at UBS AG in London:

‘‘If the experience of the 1978 peg is anything to go by, the SNB should be successful in defending this level.

‘‘However, the risks for this strategy are great and the SNB will need to carefully calibrate its money-market operations, not only to maintain its current stance penalizing franc holdings via negative implied and outright yields, but also to prevent inflationary pressures from accumulating.

‘‘In announcing a floor, the SNB has tacitly acknowledged that its money-market options have largely been exhausted.’’

Paul Meggyesi, a managing director and currency strategist at JPMorgan Chase & Co. in London:

‘‘The SNB’s strategy is a high-risk one. It will succeed for now and doubtless in coming weeks. The question is how much more intervention the SNB is willing to conduct.

‘‘There are also longer-term doubts about how much inflation the SNB is willing to tolerate. In 1978 the SNB pushed inflation from 1 percent to 5 percent within a year, and shortly after that the currency peg was suspended.

‘‘The SNB’s legal mandate is to ensure price stability --it is questionable whether a peg that required inflation will last longer than it did in 1978. These though are longer-term issues that matter little for the next few weeks. For now the SNB can reflect on a successful strike.’’

Thomas Stolper, chief currency strategist at Goldman Sachs Group Inc. in London:

‘‘This is a credible policy as long as the authorities are prepared to accept the liquidity implications of this potentially very large intervention.

‘‘However, given the SNB’s recent commitment to oversupply the franc money markets with liquidity, the new policy mix is consistent and can potentially be maintained until inflationary pressures materialize.

‘‘The risks of rising inflation seem remote currently. Political support for this measure is much higher now than last year, given the extreme moves in the franc in recent months. This likely implies a stronger commitment than during the 2010 intervention.’’

Kit Juckes, head of foreign-exchange research at Societe Generale SA in London:

‘‘Let’s see how that works. The currency wars are heating up. The Swiss will do the euro some good, which it needs badly as confidence is very poor indeed.’’

Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd.

‘‘The SNB has announced the most aggressive policy action of all. In circumstances of increased deflationary risks we should not doubt the ability of the SNB to implement the policy announced.

‘‘The SNB can print as much domestic currency as required in order to maintain the floor, but this commitment is dependent on external developments in the euro zone and may require a huge, unprecedented increase in foreign-exchange reserves.’’

--Editors: Matthew Brown, Mark McCord

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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