The Swiss National Bank and Swiss Franc Blog

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A central bank running suicide ? SNB prints at pace never seen since EUR/CHF parity in August 2011
The most recent money supply data from the Swiss National Bank (SNB) has shown increases of huge amounts. As compared with its loss of 19 bln. francs in 2010 (3% percent of the Swiss GDP), the central bank printed tremendous 17.3 bln. in the week ending in June 1st and 13 bln. in the one ending in May 25th.

These numbers were not seen since August 2011 when the SNB increased money supply by 50 bln and 40 bln per week buying the EUR/CHF at rates between 1.00 and 1.13. Now, however they are buying at 1.20 and are risking extreme losses, especially because many other central banks are dumping euros.

In the 6 winter months the SNB managed to reduce money supply by 35446 mil. CHF selling euros from its balance sheet. However, only in the last three weeks, the SNB lost all these "gains" and had to buy euros for a similar amount.

Last week rumors at CNBC about some developments at the SNB before the release of the Swiss GDP led us to the conclusion that the SNB either drops the floor or prints enormous amounts. A better than expected Swiss GDP and very bad US jobless figures were the reasons that the SNB had to print even more than in the preceding week. We calculated last week that if the speed of 13 bln. CHF per week is maintained, then currency reserves will more than double this year, a weekly increase by 17.3 bln. would mean they rise by 3 to 4 times. A member of the SNB board, Jean-Pierre Danthine said that the central bank is worried about the size of the balance sheet, but pledged that the central bank will defend the floor. No reference was made to capital controls. Earlier in March he told that Swiss inflation will come back.

The views expressed are our own and do not represent any guaranteed return on investment. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper

George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst
Disclosure: We are short EUR/CHF

DRAFT: Why the break of the floor might be a matter of weeks and not months or years

It is the same procedure as nearly every year: The statistically flawed (here and here) Non-Farm Payrolls (NFP) delivers some good readings with 200K jobs, this time additionally fuelled by a weather effect and stock markets rise strongly. Even given this statistical failures, markets forget regularly that 200K is only a bit above the average 150K new jobs (in May even 206K) needed to compensate for the net death/birth effect and that this 50K difference must be repeated every month over 14 years in to come back to full employment and cover the 8.8 million jobs lost in the financial crisis.

And then stock markets sell off in their typical "Sell in May" mode, because the 200K NFP reports are not sustainable, especially this year due to the weather adjustment into the opposite direction (worse to come in June).

On the other side of the atlantic a similar procedure repeats: Thanks to the good mood in the US economy, US orders to Swiss and German exporters rise and Swiss consumers keep on spending, the Swiss economy keeps on running close to full employment, German unemployment  beats record lows. Consequently the Swiss Q1 GDP rises strongly, beating with a +0.8% QoQ even the US +1.9 YoY, despite the fact that US GDP must grow more strongly than the Swiss one due to the strong US birth/death effect.

As soon as American investors see the bad US data, they look into different directions and realize that there are some other safe-havens, not only the US dollar, especially when the Fed is threatening their currency with Quantitative Easing again.

And this is the way history repeats during the weak US months May to September on the other side of the Atlantic:

Between May and July 2009, the SNB managed to maintain the 1.50 EUR/CHF line in sand thanks to intensive FX intervention threads. Same picture in May 2010: Strong demand for the Swiss Franc, even multiplied by the first Greek crisis. The EUR/CHF falls to 1.40. After the SNB had abandoned the FX interventions  the Swiss Franc even reaches parity with the dollar and EUR/CHF 1.30 in September 2010.

The new German economic wonder or will German companies take over the PIIGS ?

Words heart on German street in 2010 during the first Greek bailouts were that Germany should obtain the Greek islands as collateral if Greece is not able to pay back the debt to Germany. But even today German n-tv is reporting about many Greek real estate brokers that are currently selling islands.

If it is not that type of take of acquisition, at least German firms could start taking over companies located in the PIIGS. After German tourists are omnipresent in many beautiful places in Spain, Italy, Greece and Portugal, will German companies now do another wave of "colonization" ?  

On the other side, many Spanish companies recently have urged their government to intervene in order to stop short selling and potential hostile takeovers. One of the most prominent possible takeovers is the one of the portuguese national airline TAP by Lufthansa.

The secrets of the new German economic wonder

German companies are very well prepared for takeovers in all over Europe. Many of them have strongly reduced debt in the years between 1995 and 2005, Richard Koo's called it balance sheet reduction/recession, similar to the one in Japan. Germany has already corrected the years of overconsumption, it has already lived its years of disinflation and deflation. The motto for German consumers and companies during these years was "Geiz ist geil", "To be stingy is cool" !

Germany has already built a network of suppliers and factories all over Europe. German investments were strong into the new EU members in Central Europe and the Baltics, where cheap wages and advantageous tax conditions create better opportunities for German investors. Especially Slovakia is a very important supplier for the German car industry, an elongated workbench.

The debt reduction, the cheap suppliers and factories in Central Europe and very slow wage hikes in Germany itself have created out of Germany the maybe most competitive export nation. Thanks to these factors and (reversals of) capital flows after the financial crisis, Germany (but also Japan) could expand very strongly in the last 3 years. 

The following table from the German industry and trade chamber shows why German companies invested in the past into foreign countries. A main reason was to reduce costs ("Kostenersparnis") and not for market opening "Markterschließung", or sales ("Vertriebs und Kundendienst"). Recently these cost reduction objectives have been replaced more and more by sales and market opening aims.

After the consumers in the PIIGS have been become reluctant to spend and the PIIGS firms reluctant to hire, only new investments would be a solution to the current crisis. But are German companies really interested in taking over their peers in the PIIGS, given that wages and indirect labour costs, administration overheads are often a lot higher than they are in Central Europe ?

For example minimum wages in Spain or Greece are still 2 or 3 times higher than they are in Central Europe, or even 5 times higher in Ireland.

The 2011 statistics from the German industry and trade chamber shows where German firms are investing:

The investment to the EU-15 is taking still a big place, but 60% of the firms want to closer to the consumers ("Vertrieb/Kundendienst"), whereas on 16% want to reduce costs. Investments into new EU Member countries, however, are still strongly based on cost reduction (27%, "Kostenersparnis") and relatively high still 24% (previous year even 30%) compared with 40% into the far bigger EU-15. The idea behind the investment into China by 40% the opening of the new market ("Markterschließung").

The German foreign investments did not stop German industrial to rise, quite on the contrary: 

 The investments into Central Europe were just complementary to the strong expansion of the rise of industrial production in Germany itself. During an even smaller timeframe than above estonian industrial production almost doubled:

SNB End April Balance Sheet: SNB Forex Reserves Increased already in April
The End April Balance Sheet of the Swiss National Bank

The recent official money supply statistics did not show that the SNB was already buying Euros already in April. The end April balance sheet, however, made it clear that Forex reserves increased, whereas the central bank managed to reduce money supply till May 11th.

The trick was borrowing at the Swiss confederation and reducing money supply to local banks. The borrowing at the confederation is not included in the official money supply data.

On the other side the SNB could have made some Forex gains through its recent strategy to diversify into USD, GBP and JPY.

Details coming this weekend.

The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

CNBC rumors that something is going on at SNB: 6 possibilities for us
There are currently rumors going on on CNBC that the SNB is planning something this night. As we explained here, the SNB had to strongly restart the printing press and printed tremendous 13 bln francs in one week. Moreover, they probably sold some of their in Q4 2011 and Q1 2012 acquired GBP, JYP and USD. Furthermore, Jordan ruled out a hike of the floor. The EUR/CHF is completely flat at peg level of 1.2010.
The USD/CHF has risen to 0.97 from 0.71 in August 2011. Swiss exporters (40% to USD-correlated areas) are happy with this situation, but imported inflation is increasing due to the stronger dollar. Swiss GDP is to rise strongly in Q1, 2012, the announcement will be tomorrow 7.45 Swiss time, a big evidence for an action or a lot of work for the SNB traders! The pressure on the SNB to print will surely increase.

There are six possibilities for us:
  1. They are planning capital controls, negative interest or similar. We have ruled this out, here. This would not be a night action like the rumor implies.
  2. The SNB removes the floor completely and let the franc freely float. Already the OECD suggested the floor is appropriate as long as the Swiss economy has problems, but otherwise it would be simple protectionism.
  3. They take the pressure out of the printing press and lower the EUR/CHF to 1.10. This was already implicitly coming via currency reserves as explained here.
  4. They take the pressure out of the printing press and to stipulate a floor against a currency basket. For sake of easiness the central bank would prefer a EUR/USD combined floor, e.g. at 1.10/0.90. For us the second biggest possibility.
  5. They announce a crawling peg, e.g. 2-3% devaluation per year (along inflation difference) on EUR/CHF allowed.
  6. Nothing happens. Just rumors. They just get prepared to print early tomorrow when Swiss GDP comes out. Due to current public opinion and the latest SNB statements, that they defend the 1.20 floor, still the most probable option. 

In these statements, Jordan, however, indicated in several questions that money printing was dangerous because the SNB fears a real estate bubble. To make the franc more expensive at least for foreigners would be a solution, a SNB job.

Actually he spoke in more details about stronger controls on banks than about the floor, after the 10 years CHF fixed-term mortgages had fallen to 1.5%. All these measures, however, need to be taken by the Swiss government. For the German speaking followers, one political option would be a stronger Lex Koller so that foreigners cannot buy Swiss houses any more, even when using some tricks

What will happen to the SNB balance sheet, when the floor is lowered to 1.10 ?

We do not speculate on the effect on massive stops under 1.20 and the consequences. Our blog aims to understand the thinking inside the SNB. Therefore we calculate how much the SNB will loose when it lowers the floor. The calculations are not intended to be 100% correct !

We base our calculations on the most recent money supply data. Since bank notes of around 50 bln. are missing in this data, the FX reserves are actually 10-20% higher.

and the distribution of the currency reserves on the Q1 balance sheet:

The maximum losses are:

EUR positions (51% of FX reserves, new exchange rate EUR/CHF 1.10 from Q1 1.20): Losses of 23 bln. CHF go into the books
USD positions (28%, new exchange rate USD/CHF 0.88 from 0.97, but end Q1 0.90): slight losses
JPY positions (9% new exchange rate CHF/JPY 90 from 81, but end Q1 90): no change
GBP positions (5% new exchange rate GBP/CHF 1.39 from 1.50, but end Q1 1.44): slight losses

Gold positions (additional 20% of the currency reserves,  50 bln. CHF, now 1559, end Q1: 1669)
Losses in gold positions (prices are in USD) accumulated:  6 bln CHF. If the floor is changed then these losses cannot be compensated any more via the rise in USD/CHF.

Overall maximum losses: 33 bln. CHF, it is a vague estimate
(to our opinion better than printing 13 bln. per week)

What will happen to a combined EUR/USD floor at 1.10/0.90
Idea: The way is to stipulate that none of the two floors, EUR 1.10 and USD/CHF 0.90 can be breached.

The maximum losses:
A bit lower, since USD/CHF will be above 0.90 and not fall to 0.88 in the worst case.

The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

Attention: SNB might be a net seller of GBP apart from blowing up its balance sheet

As explained in our previous post, at least till May 4th the Swiss National Bank could have been a net buyer of GBP, USD and JPY selling Euros off their balance sheet. In the week of May 11, QE3 talk came up together with a bad Phily Fed reading. From then the SNB had to acquire Euros in order to maintain the EUR/CHF floor. Partially they were probably not only printing CHF, but also realizing their gains in the SDR currency basket (USD, GBP and JPY) in which they bought before.

The currency they invested relatively to market share the most, was the British pound (it was underweighted in the SNB balance sheet, details here). Sterling, however, might be now the currency, which they are most likely to sell.

Effectively, the pound reached a top against the dollar, in the end April, beginning of May. Since the SNB has changed its strategy, sterling has plunged nearly as much as the euro.

As visible in the table above, the critical level when the SNB switched from selling Euros to buying Euros was about EUR/USD = 1.28. Adding the recent bad US data and good Swiss data, the level might have risen to EUR/USD 1.30. Over this level (and good US and global economic data) the SNB can sell Euros again, under this level the central bank continues to blow up its balance sheet. 

Since for the SNB selling Euros means buying GBP (and others) and buying Euros implies selling GBP (et. al)., the exercise is simple: You could trade with the SNB traders, i.e. sell the GBP/USD and hedge this (depend on your judgement of market conditions) with a Long EUR/GBP. One could continue this strategy as long as the EUR/USD is under 1.30 and the SNB starts buying GBP again. 

If the Euro rises against the dollar based on good German data, it is sure that the SNB will need to continue to buy masses of Euros and sell sterling. If, however, good US data comes in and the euro rises thanks to this data, then the SNB will buy GBP again.

The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

Former SNB chief economist: Capital controls are just empty words
A former SNB chief economist says that capital controls are impossible, just empty words. In case of a Euro break-up the Swissie must rise together with USD, GBP and JPY 

An article, surprisingly from the usually left-wing Tagesanzeiger, more or less closely translated with some additional remarks. 

Professor Kurt Schiltknecht, 1974-1984 Chief Economist of SNB, told an anecdote. In the 1970s the Swiss franc was - like today - under strong upward pressure. Fritz Leutwiler, former President Director of the SNB wanted to define in this situation, a lower limit for the D-Mark. He, Schiltknecht, argued that was no use. Leutwiler replied that he knew well. But if the political pressure is too big, the central bank should just announce something no matter what.

Author's remarkSchiltknecht strongly critized the SNB, when it intervened "far too early" at the EUR/CHF level of 1.40, but was in favor of the floor of 1.20.

With the political pressure on the SNB, its independence from the politicians is always challenged ?  
"My experience is," says Schiltknecht, "that the pressure is always very high on the SNB monetary policy." At least such statements give the people the feeling that the central bank were prepared for everything.

It raises the question of what Thomas Jordan, the current President of the Directorate of the SNB, with his statements in the "Sunday paper" really aimed to say. To combat the strong franc, the central bank is thinking about other measures such as "capital controls, these are arrangements that affect the inflow of capital into Switzerland directly."

Capital always finds its way

"Attempts to control the movement of capital, have never happened", Schiltknecht says. The economic historian Tobias Straumann agrees: "Negative interest rates or taxes on investments in Swiss francs can be bypassed very easily." On the foreign exchange market in London would any investor buy francs and "hold francs anywhere in the world where the Swiss authorities do not have access".

The capital control measures in 1970s

In the 70s there were three main measures that were enacted:

  • Prohibition of investment by foreign funds in Swiss securities and real estate.
  • Ban on paying interest on CHF deposits belonging to foreigners
  • Taxation of CHF deposits belonging to foreigners with a negative interest rate
Initially these measure were foreseen as a gentlemen's agreement between the National Bank and banks. As the banks did not really implement them, the government enacted the measures by law. However, they proved to be ineffective, money always finds its way... 

Author's remark: As opposed to Switzerland in the 1970s, Brazil had implemented in 2010 even stronger measures, which still could be circumvented. The Swiss situation is different to Brazil. Brazil is not a safe-haven, it does not have a big private banking sector. Swiss banks, especially now, experience big inflows from the Emerging Markets, where inflation and a starting sell-off in the real-estate markets (here and here) have triggered strong capital inflows into Switzerland.

Enormous costs for capital controls

The Swiss Banker's Association is skeptical versus capital controls. "Switzerland is well run as an open economy", says its spokesman Thomas Sutter. "The widespread implementation of these controls in today's global world is practically impossible." Pronouncing these types of enactments is not everything. The capital controls would need to be controlled. The banks would have to report any money transfer, cross-border cash movements should be controlled. The costs would be enormous.

Author's Remark: Switzerland has two particularly important sectors: The exporters, who take profit when the world economy expands and the banks who take profit of the Swiss status as safe-haven, often demanded when the world economy contracts. Whereas exporters expanded between 2009 and 2011, banks experienced slow growth. Now it might be just the opposite, banks like UBS have strong inflows. If capital controls are really implemented, they would limit the capital inflows toSwiss banks which bankers strongly oppose (see what former UBS boss Grübel says). Strong capital inflows, again help the local Swiss economy and the Swiss real-estate sector. Exporters and safety flow into private banks, create out of Switzerland, a "perpetuum mobile", an economy that always expands, no matter what the world economy is like. The only risk factors are a real-estate bust and a depression of the German economy, both happened between 1995 and 2005. See full details here

Swiss economy is strong enough

As an economist, Kurt Schiltknecht may not believe that the National Bank is considering seriously such interventions in the capital market. The Swiss economy does not need such protective mechanisms. .... Despite the appreciation of the franc, despite all the moaning and groaning about the exchange rate, the Swiss economy is not harmed. "Should it really come to a further appreciation wave," said Schilt servant. "This is certainly not pleasant". 

But if the euro zone experiences a break-up, other currencies - dollars, pounds and yen - would rise.
 "If the franc rises together with these currencies, we can be happy."

Author's Remark: He is saying that in the case of euro break-up the euro will strongly devalue (i.e. EUR/USD = 1.00 or lower). The EUR/CHF floor must break, otherwise Switzerland would experience strong inflation. And the Swiss would be happy that the floor had broken.

The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

Huge rise in Currency Reserves: The SNB has restarted the printing press

The game for the Swiss National Bank seems to have changed completely. Again the central bank had increase money supply, as measured by deposits at the SNB by local banks and other sight deposits, this time even by 13219 mil. francs (source). This money printing implies that the SNB had to buy in Euros in similar quantities in order maintain the floor.

Already last week the central bank had to shift its strategy from selling Euros to buying Euros. The SNB managed to reduce money supply by 35446 mil. (i.e. sell mostly euros) between Sep 9, 2011 and May 11, 2012. In the last two week it had to increase money supply by nearly 17000 mil. CHF, loosing nearly 50% of all "gains" in the previous money supply reduction.

We have speculated that the SNB will double or triple the Forex reserves before it gives in and the floor will break. 

At the current speed of 13 bln per week, this will result in 676 bln. CHF per year, i.e. they will have tripled money supply and currency reserves in one year. This sum exceeds slightly the Swiss GDP, implying that a break of the floor from 1.20 to 1.10 (about 10%) on the basis of 50% Euros in the SNB reserves would result in a loss of around 5% of GDP at the central bank. Moreover, in the week ending in May 25th, nothing really extraordinary happened, what would happen in case of a Greek euro exit?

Is the Swiss debt soon rising more quickly than Italy's one ?

If this SNB loss is realized, it would imply an increase of Swiss total debt (here the Swiss debt clock) by around 5% in one year. This is barely better than the 5.4% yield Italy has to pay on its debt services and is only weighted by the fact that Switzerland has currently negative yields on bills and a small primary surplus between 3 and 6 bln francs per year, abstracting from the small interest part).

As opposed to Italy, Switzerland cannot devalue the debt via inflation, since Swiss inflation is about zero and Italian inflation at 2.5%. On the contrary a break of the floor would even revalue the debt via deflation,

Swiss laws prohibit the state from taking too much debt, formulated in the famous Swiss debt break. The only institution that can do, whatever it wants, is the Swiss National Bank.

Should the floor continue to hold, it is possible that even bonds with higher maturities (up to 5 years) for the Swiss confederation (10 years yield currently at 0.64%) will have negative yields.

The SNB seems to be really anxious about this sudden rise in demand for the franc, they have even announced capital controls for the case of a euro break-up. 

The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

SNB's Jordan admits that EUR/CHF floor will not be raised
For the first time the chairman of the Swiss National Bank Jordan has admitted that the EUR/CHF floor of 1.20 will not be raised. In an interview with the Swiss Sonntagszeitung, here also cited by Bloomberg, he said:

"We can not arbitrarily manipulate our currency. In an even worse crisis situation this would be disastrous and counterproductive. The minimum price must be legitimized. The current minimum rate is realistic and has helped the Swiss economy."

This is a further weakening in the language of the central bank. Jordan's words sound like a response to the accusations of a leading Swiss exporters, the CEO of Swatch, Hayek, in the same newspaper who claimed that a hike in the floor would have been easy recently for the SNB and that the SNB was successful in scaring the markets. 

For months the SNB continued to vow that they might take further measures to weaken the franc, even if wording changed from the "massively overvalued franc" in August 2011 over "significantly overvalued franc" in January 2012 to "overvalued franc" in April.

Jordan confirmed reports that safety flows are again directed into the Swiss franc. But Jordan continued to vow that the floor will be defended at any time. In case of a Greek exit, the central bank, might introduce capital controls. For us, this is just a measure to hold the EUR/CHF above 1.20, but by no means a measure to hike the floor. 

The SNB had managed to reduce money supply (measured by deposits at the SNB by local banks and other sight deposits; deposits by the Swiss confederation and bank notes are excluded from this number) by 35 bil. francs (but only 17% of their previous purchases) between September 2011 and May 11th 2012, whereas it increased money supply by nearly 205 bln. CHF between March and September 2011. 

In the week of May 18th the SNB had to buy Forex reserves of around 3.7 bln. francs, giving away more than 10% of the previous 35 bln. reduction of money supply. Maybe it is the SNB that is scared of the markets now....

The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst



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