Switzerland’s pain

Publication date: 5 September 2012
Author: Simon Smith, FxPro

Tagged with: Simon Smith

Tomorrow marks the first anniversary of the SNB’s imposition of a cap on the CHF (limiting EUR/CHF to 1.20) and promising to sell francs in “unlimited amounts” in order to defend this level. There’s no doubt that it’s been a tough year for the SNB, especially during the past 4-5 months when the pressure on the franc has been that much stronger and FX reserves have ballooned as a result. Indeed, reserves now are roughly 70% of GDP.

There have been times when some have speculated that the EUR/CHF peg might be moved higher (towards the end of last year) and also when it was felt it may not hold (early April this year and beyond). The peg may have held fast, but it’s not been without cost. As well as investing and managing such a reserve pile, the SNB has also had to contend with the impact of this increased Swiss franc-liquidity on the domestic economy. This remains the main risk for next week, namely that new measures are announced to curtail the impact of liquidity, most notably in the property market. Indeed, comments by board member Danthine underlined the risk in the property market in comments reported today.

It’s ironic that in avoiding the property-related excesses of others and the sovereign problems of much of the eurozone, the SNB is now facing such bubble risks in the property sector as a by-product of defending the franc. Whilst inflation data out this morning rose (but remains at -0.5% YoY), it also serves as a reminder that focusing solely on inflation is a broken approach, as risks to financial stability build elsewhere.