Swiss franc shock shows central banks’ limits

The surprise removal of the euro/Swiss franc currency peg showed the limitations of central banks’ powers in fighting market forces, according to two currency pundits.

The Swiss National Bank’s (SNB) policy U-turn caused losses at some traders and brokers, Cerno Capital managing director, James Spence, said. He continued by saying that using Swiss francs as a funding currency for higher yielding assets showed that some market participants are taking progressively bigger risks in a low return world. “The behaviour of traders can be compared to thirsty people in a desert. Eventually you begin to imagine things that do not exist.” He added that the currency floor set by the SNB in 2011 would always be temporary in nature and some had forgotten this. “Ultimately, the SNB decided to align itself as a value preserver and lifted its yoke to the euro,” Spence commented.

Amundi senior economist, Nicolas Doisy, said that the SNB was cornered by a one-way bet, with the increase in the SNB’s balance sheet starting to threaten financial stability, as it issued bonds to finance the purchase of euros, in order to main the currency floor. Doisy said: “The rationale for the move is that, over the almost four years of FX interventions by the SNB to buy large amounts of euro, the Swiss central bank’s balance sheet was threatening to become overinflated, having increased by close to 30 percentage points of GDP.”

Doisy added that the policy move will help the European Central Bank’s quantitative easing programme, by locking in the Swiss franc as a safe haven and carry-trade currency of choice as the euro devalues. Doisy said the 20% rise of the Swiss franc against the euro should discourage Greek investors shifting assets to Switzerland. He added: “Less liquidity will be tempted to leave the Eurozone for Switzerland just when the ECB is launching its QE, the SNB is indeed (intentionally or not) doing the ECB a big and very timely favour.”