The Swiss National Bank and Swiss Franc Blog

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.

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

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