Swiss central bank President Philipp Hildebrand, who ended 15 months of intervening in foreign-exchange markets this year, may prove powerless to stop the franc from extending a record rally that he calls a “burden”.
Options traders are more bullish on the franc for the next three months than any major currency except the yen, according to data compiled by Bloomberg. Bank of Tokyo-Mitsubishi UFJ says it may appreciate 8.3 per cent to 1.17 per euro in six months after rising more than any major peer since intervention ended in June. Standard Bank estimates an advance to 1.20.
Currency traders say Hildebrand probably won’t renew efforts to stop the gains after previous sales failed to halt the appreciation that made exports more expensive and saddled the Swiss National Bank (SNB) with $22 billion of exchange-rate losses in the first nine months of 2010. While policy makers said on June 21 that intervention was no longer needed as the risk of deflation had ebbed, price increases have since slowed.
“The SNB cannot do much, they are just observers,” said Beat Siegenthaler, a Zurich-based currency strategist at UBS, ranked by Euromoney Institutional Investor as the world’s second-biggest foreign-exchange trader. “Of course they are very worried. Their options are limited.”
Switzerland’s currency, a haven in times of economic turmoil, has strengthened 17 per cent against the euro this year amid concern the fiscal crisis engulfing Greece, Ireland, Portugal and Spain will curb growth in the 16-country region and may force some nations out of the monetary union.
The franc’s gain against the euro is an additional “burden” for Swiss exports, which account for about 50 per cent of gross domestic product, Hildebrand told reporters in Zurich on December 16. Growth in Switzerland’s $492 billion economy is likely to be “significantly lower in the quarters ahead,” partly because of the currency’s strength, he said.
Werner Abegg, a spokesman for the central bank, declined a Bloomberg News request to arrange interviews with policy makers.
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The SNB said it had started selling on March 12, 2009, its first solo foreign-exchange intervention since 1992. The policy, designed to ward off deflation, protect exports and revive growth, sparked the biggest one-day decline since the euro’s 1999 start. The franc slumped 3.4 per cent to 1.5299 per euro. By the end of June 2010, it had strengthened 16 per cent to 1.3184.
SNB’s losses
The central bank said on November 12 that it had a nine-month loss of 8.46 billion francs ($8.8 billion) after depreciation in the euro and dollar caused its holdings to decline in value by 21.2 billion francs. A year earlier, the 103-year-old bank reported a profit of 6.89 billion francs.
“The SNB tried intervening, and that clearly didn’t work, so they stepped away,” said Richard Benson, a London-based executive director at Millennium Asset Management, who oversees $14 billion of currency funds. The franc “will carry on strengthening whilst the stresses and strains of the euro zone cease to be resolved,” he said.
Derivative traders are paying a 2.56 percentage-point premium for three-month call options, which grant the right to buy the franc against the euro, relative to puts, which allow for sales, Bloomberg data show. That compares with an average premium of about 1 per centage point over the past two years.
Ratings downgrades
The franc may strengthen toward 1.10 per euro next year as the debt crisis in Europe intensifies, Lee Hardman, a London-based strategist at Bank of Tokyo-Mitsubishi, wrote in a note to clients on December 22.
Fitch Ratings cut Portugal’s debt rating one level to A+ on December 23, citing concern about the “financing environment” for the government. Moody’s Investors Service said on December 15 it may reduce Spain’s Aa1 credit rating and a day later placed Greece’s Ba1 classification on review for a possible downgrade. Ireland was cut five levels by Moody’s on December 17. Switzerland has top AAA rating from the three companies.
Analyst forecasts remain bearish on gains by the franc. As recently as November 30, the median of 28 estimates compiled by Bloomberg was for the franc to end 2010 at 1.33 per euro. The currency will trade at 1.30 by the end of March, a separate survey of 34 strategists showed.
Some investors say the franc is too strong, with the nation’s benchmark interest rate 0.75 per centage point below the European Central Bank’s 1 per cent. Two-year notes yielded 48 basis points less than German securities of similar maturity on December 23, compared with 39 basis points at the end of September.