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SNB’s Franc Defense Swells Reserves to 71% of GDP: Economy

August 07, 2012

Swiss Franc Defense Pushes Reserves to Record 71% of Economy

The central bank’s foreign currency reserves have expanded almost tenfold since March 2009, when it started its first round of purchases to prevent the franc from appreciating against the euro, the currency of the country’s main trading partners. Photographer: Gianluca Colla/Bloomberg

The Swiss central bank’s foreign- currency reserves surged to a record in July as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc ceiling.

Switzerland’s cash pile swelled 11.3 percent in the month to 406.5 billion Swiss francs ($420 billion), the Swiss National Bank said on its website today. That pushed holdings to 71 percent of gross domestic product. Walter Meier, an SNB spokesman in Zurich, said “a large part” of the increase resulted from currency purchases to defend the minimum exchange rate.

SNB President Thomas Jordan has pledged to enforce the franc ceiling of 1.20 per euro “with unlimited purchases of foreign currencies if needed.” The central bank implemented the cap in September to fight deflation and help exporters. Its reserves have soared 44 percent since the end of that month, according to SNB data calculated to International Monetary Fund standards.

“The SNB can keep its pace of interventions for a pretty long time unless there is a massive disruption like the collapse of the euro area,” said Maxime Botteron, an economist at Credit Suisse Group AG (CSGN) in Zurich. “As they increase liquidity through their purchases, the only limiting factor is inflation. However, that is not a concern at the moment.”

Haven From Crisis

The Swiss franc weakened after the release and traded at 1.2015 versus the euro at 2:13 p.m. in Zurich. It has traded in a range of 1.20 to 1.24 since the cap was imposed, breaching it just once on April 5. Against the dollar, the Swiss currency traded at 96.62 centimes.

The central bank’s foreign currency reserves have expanded almost tenfold since March 2009, when it started its first round of purchases to prevent the franc from appreciating against the euro, the currency of the country’s main trading partners. Investors have been piling into the franc as they seek a haven from the global financial crisis.

Through its purchases, the SNB increases liquidity available to the country’s banks and consumers, raising the risk of price increases in the medium and long term. Still, Swiss consumer prices fell from a year ago for a 10th straight month in July. Jordan said in June that “in the foreseeable future, there is no risk of inflation in Switzerland.”

Dollar Reserves

In recent months the Swiss central bank has also diversified its portfolio by swapping the euros acquired through its interventions against other currencies including the U.S. and Canadian dollars, the pound and the yen. Dollar reserves rose to 79.4 billion francs at the end of the second quarter from 63.9 billion francs at the end of March, the central bank said on July 31.

Some analysts say the SNB’s interventions and its purchases of assets may distort currency markets.

“Whenever you have a participant of this size entering the market it will shift the dynamics, especially when you consider that the investment choice is not based on any market-oriented basis, such as fundamentals, but purely portfolio allocation,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva.

Switzerland’s export-led economy is resisting the global downturn. The unemployment rate has been below 3 percent since April 2011, bolstering private spending, and the KOF leading indicator increased for a sixth month in July. Still, export growth was flat in the second quarter and the government in June said “the recent deterioration in Europe poses a serious threat” to the Swiss economy.

Australian Rate Decision

Australia’s central bank today kept interest rates unchanged at a developed-world high, citing a domestic expansion that’s also weathering the global slowdown. The local currency touched the strongest in 4 1/2 months.

Governor Glenn Stevens and his board left the overnight cash-rate target at a 2 1/2-year low of 3.5 percent for a second month, the Reserve Bank of Australia said in a statement. Policy makers lowered rates by 1.25 percentage points from November to June, leaving borrowing costs “a little below their medium-term averages,” Stevens said.

In the U.S., confidence among chief executive officers declined in the second quarter as more business leaders said economic conditions will worsen in the next six months, a private survey showed.

The Young Presidents’ Organization sentiment index fell to 60 in the second quarter from 65.1 in previous three months, the largest decline since the survey began in 2009. Readings greater than 50 show the outlook was more positive than negative.

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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