August 3, 2011
There is that famous line from the movie Die Hard: “You ask me for miracles, I give you the FBI.” Well, to all the gold bulls out there, “I give you the SNB.” The Swiss central bank “unexpectedly” intervened to curb the record appreciation of the Swiss Franc which is having Swiss exporters seeing black and blue, by saying it would cut rates and by increasing the supply of francs to money markets. Specifically it lowered its target 3 month Libor to “as close to zero as possible” from 0.25%. The central bank also expanded banks’ sight deposits to 80 billion Swiss Francs from 30 billion and said it will repurchase outstanding SNB bills. So while it did not directly go ahead and buy dollars it made it all too clear the SNB’s appreciation days are over. Which leaves those seeing a non-fiat based refuge from all the insanity in Europe (which is currently raging at unseen before levels, and as a result the EU announced it would issue a statement on the situation in the markets this afternoon – expect nothing but more lies and BS) and the rest of the world, with just one option. Gold.
Here is Goldman with more perspective on this intervention:
In reaction to the sharp appreciation of the CHF over the past couple of weeks, the SNB announced a rate cut this morning, reducing its 3-month CHF Libor target to 0.00-0.25%, from 0.00-0.75% previously. Given that the SNB was targeting 0.25% within the old range – and 3-month rates were actually below that target – this change in target should be seen mostly as symbolic. However, it also shows that the risks to the monetary policy outlook have shifted significantly and our rate forecast is under review.
The SNB also announced that it would increase the supply of liquidity to banks by raising banks’ sight deposits at the SNB from around CHF30bn to CHF80bn. The idea behind this measure seems to be that, by increasing the liquidity available to banks, some of that liquidity will flow into Euro-denominated assets, thereby reducing the pressure on the CHF. Put differently, the SNB is aiming at the exchange rate channel in this latest ‘quantitative easing’ exercise.
The SNB will also “keep a close watch on developments on the foreign exchange market and will take further measures against the strength of the Swiss franc if necessary.” Direct foreign exchange interventions would be the obvious next step the SNB could take. While the experience with the latest round of interventions was mixed at best, the recent CHF appreciation has apparently been strong enough to make the SNB consider resorting to such a step again if the increase in liquidity does not show results.
The resilience of Swiss exports in the face of the large appreciation of the CHF (+8.5% in trade-weighted terms over the last four weeks) has been remarkable (see chart below). But it is only a matter of time before Swiss exports will correct more meaningfully if the exchange rate remains around these levels.
Elsewhere Barclays thinks that this intervention will be more successful than the bank’s horrendous meddling in the markets which ended up costing it billions in losses. Via Bloomberg All News: The “SNB may be more effective this time in weakening the Swiss franc compared to back in 2010″, Paul Robinson, strategist at Barclays, writes in note. The EUR/CHF is “significantly undervalued” compared to 2010 by ~32% on PPP basis and 28% on BEER model; this makes intervention more likely to succeed. The CHF’s relative value to other safe-haven assets matters and since April 2010, CHF has gained 10% vs JPY, 26% vs USD. SNB will be highly aware of mkt view that it had failed in its 2010 intervention to weaken the CHF; this means SNB “will not back down quickly” if intervention doesn’t weaken CHF; intervention may be large and sustained this round to ensure credibility. Recommend sell CHF vs other “safe currencies or assets”, like yen and gold.
This article was posted: Wednesday, August 3, 2011 at 7:09 am