EUR/CHF Approaching 1.20; Swiss National Bank To Intervene
This should be interesting 
This should be interesting
Yes it will
Imagine : euro falling like a rock and SNB buying like crazy to keep it over 1.20 for CHF There will be some interesting selling oportunities
SNB Seen Keeping Franc Cap Until 2016 as ECB Eases Policy
The Swiss National Bank is likely to keep its cap on the franc in place until at least 2016 as central bankers in the surrounding euro area loosen policy further, economists say.
Eighteen of 21 economists in the Bloomberg Monthly Survey say the SNB won’t give up its minimum exchange rate of 1.20 per euro this year or next. Just three predict an exit from the measure in 2015.
The Swiss central bank, based in Bern and Zurich, set the cap three years ago to ward off deflation after investor concern pushed the franc nearly to parity with the euro. The European Central Bank’s introduction of a negative deposit rate and announcement of plans to buy asset-backed securities has lifted the franc against the euro in recent months, intensifying speculation that the SNB could again wage currency interventions or enact its own deposit charge.
“With the ECB cutting interest rates and honing in on quantitative easing, the SNB will have no choice but to extend the timeframe of its currency cap against the euro,” said Eric Tannenbaum at Moody’s Analytics in West Chester, Pennsylvania. “The SNB will enforce this policy by either moving into negative-rate territory themselves, aggressively stepping up currency interventions, or both.”
SNB Stands Ready With Further Measures If Needed, Zurbruegg Says
The Swiss National Bank is prepared to take measures to supplement its cap on the franc, Governing Board Member Fritz Zurbruegg said.
“There’s no discussion, we will with utmost determination make sure that the minimum exchange rate is not questioned, either with unlimited purchases of foreign currency, and if necessary we will take further measures immediately ,” he said in a speech in Geneva today. “We have a franc that is highly valued.”
The SNB, based in Zurich and Bern, set a ceiling of 1.20 per euro on the franc three years ago to ward off deflation and a recession. SNB policy makers have repeatedly pledged to take steps, including negative interest rates, to supplement the cap immediately if warranted. The European Central Bank has already cut its deposit rate to minus 0.2 percent in a bid to stimulate price growth.
“The impact on the financial system is probably stronger than the measure that’s been taken in the ECB because we do not have temporary excess liquidity in the system as is the case in the ECB, we have permanent liquidity in the system,’ he said. ‘‘Sight deposits are there and someone will take a hit.”
At the SNB, there are more than 300 billion francs ($317 billion) of domestic banks’ sight deposits. Sight deposits are cash-like deposits held by commercial banks with the central bank.
Swiss Franc Volatility Stirs as SNB Vote Raises Cap Risks
A referendum the Swiss National Bank says will impede its ability to conduct monetary policy is contributing to bets on greater price swings in the franc on concern its currency cap may be at risk.
Two-month implied volatility on the euro-franc exchange rate is the highest since 2012 relative to a one-month gauge. That reflects a growing price premium for options linked to the currency for the period including the vote on the SNB’s assets. The referendum, which the SNB says would make it hard to fulfill its mandate, is due on Nov. 30.
If passed, the proposal would require the central bank to hold at least 20 percent of its assets in gold, among other measures. The SNB held foreign-exchange reserves of 462.2 billion francs ($488 billion) at the end of September with total assets of about 522 billion francs. The risk is that it would become more difficult for the central bank to defend its cap by amassing more foreign exchange. The SNB may also need to use its currency reserves to buy gold.
“Should this go through it’s going to have profound effects on the SNB’s ability to hold the floor,” said Peter Rosenstreich, the chief foreign-exchange analyst at Swissquote Bank SA in Gland, Switzerland. “Looking out at the volatility curve you’re starting to see people are pricing it in. Not tomorrow, but two or three months down the line, people are expecting something to happen.”
The franc has strengthened 1.8 percent against the euro this year as the European Central Bank lowered interest rates to records and started an unprecedented program of private asset purchases. That’s moving it closer to the 1.20 francs per euro cap imposed by the SNB to limit the currency’s appreciation. It was at 1.20594 francs per euro at 5:08 p.m. London time today.
Implied volatility on two-month options for euro-franc slipped to 3.53 percent today. While that’s above its 2.81 percent average for the year, it’s down from a record-high of 28.07 percent in August 2011. The one-month implied volatility declined to 2.54 percent.
The premium for two-month options to buy the euro against the franc versus those allowing for sales dropped to 0.24 percentage points today, the least since Sept. 30, 25-delta risk reversals show.
The SNB set its currency limit in September 2011 after investors anxious about the euro-area debt crisis pushed the franc nearly to parity with the single currency. It hasn’t intervened to defend it since September 2012.
Swiss May Not Be Able To "Save Our Gold"
The euro has slipped to its lowest level against the EUR/CHF since late 2012. It has come within about 20 pips of the floor that the SNB has imposed at CHF1.20. The referendum at the end of the month is capturing the attention of market participants.
The referendum, dubbed "save our gold initiative" will be held on November 30. If it is ultimately approved by the voters and the cantons, the Swiss National Bank would be required to 1) keep 20% of its reserves in Gold, 2) no longer be able to sell gold, and 3) retain possession of its gold holdings in Switzerland.
After having sold an estimated 1500 tonnes of gold between 2000 and 2008, and rapidly increasing its hard currency reserves during the financial crisis; first by buying foreign bonds in its version of QE, and second by imposing and defending the euro floor/franc cap in 2011. This has left SNB's gold holdings at about 8% of their reserves.
In order to bring the gold holdings to 20% of reserves (~CHF544 bln), it would need to buy about 1500-1800 tonnes of gold, depending on the price and the value of its reserves It would have five years to implement the measure. Most observers conclude it would have to sell some of its currency holdings (primarily euros, but also perhaps some dollars as well). Some observers suspect the SNB's demand for gold would lift the price of the precious metal as much as 18%.
However, we are less sanguine. First, we do not expect the referendum to be approved. The latest polls suggest support is waning for the referendum, which was forced upon the electorate by the Swiss People's Party securing 100k signatures, after the parliament refused to take it up (Swiss population ~8.1 mln). All major Swiss parties and the Swiss National Bank are opposed. The SNB has gone further argue that if the referendum does become law, it will interfere with its ability to achieve its mandate.
Second, the referendum is just the first step in the process. The next step is to get the cantons to approve. A majority of cantons are also reportedly opposed. The cantons typically receive dividend payments from the SNB's reserves. The SNB warns that the profit distribution to the cantons would be in jeopardy if it held so much of the non-interest bearing gold. The cantons use the funds from the SNB to pay for social services. Last year, drop in gold prices (-28%) forced the SNB to cancel the dividend.
However, even if it the proposal passes these first two steps, the SNB still has other options. In principle, the SNB does not have to sell euros or dollars to buy gold; it can create new reserves (print money) to buy gold. In addition, the SNB could form a sovereign wealth fund as many other central banks have done. In this new sovereign wealth fund, the SNB can allocate the bulk of its currency reserves, outside of a modest amount needed for liquidity purposes.
Swiss Franc Set to Turn Brazen From Boring Under Options Pricing
The Swiss franc’s price swings against the euro have diminished to a three-month low as it creeps toward the cap defended by Switzerland’s central bank since 2011. The options market indicates that’s about to change.
One-month implied volatility on the euro-franc, derived from options prices, climbed to 4.87 percent today, the most since September 2013. That’s about 3.20 percentage points higher than the currency pair’s volatility over the past month, and the biggest difference in almost 2 1/2 years.
The currency has strengthened before a Nov. 30 referendum that the Swiss National Bank has said will impede its ability to conduct monetary policy. Should the vote pass, the central bank will have to hold 20 percent of its reserves in gold. That will make it harder for policy makers to defend their 1.20-per-euro cap by purchasing foreign currencies.
Today, the franc appreciated through 1.2010 per euro for the first time since September 2012.
“The gold vote is obviously focusing people’s attentions very much on SNB policy,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “As we get closer to the floor, volatility could well pick up.”
The franc was at 1.20129 per euro as of 2:13 p.m. London time. It earlier reached 1.2009, the strongest level since September 2012, when the SNB says it last sold francs to enforce the limit.
The cap was breached only once since its implementation in September 2011, when the franc strengthened to 1.19995 per euro on April 5, 2012. |
I've seen the giant Swiss spike in the past, maybe we are in for another.
SNB May Need to Buy Euros Daily to Defend Franc Cap, UBS Says
The Swiss National Bank may have to purchase euros on a daily basis and introduce negative deposit rates as investors push the franc toward its 1.20-per-euro cap, according to the nation’s biggest bank, UBS AG.
Price action over the past few days indicates the central bank has been purchasing the 18-member currency to defend the cap, UBS strategists including Zurich-based Beat Siegenthaler, wrote in an e-mailed note today. Sight deposits data, set to be published on Nov. 24, will give the first indication of whether this is the case, the note said.
Traders are unwilling to buy the euro against the franc “because the tail risk of the floor breaking is looming too large,” the strategists wrote. “As a result, the cross could become trapped at current levels with the SNB prompted to be active on a daily basis. Negative deposit rates might be the only way out of the situation as they would give traders renewed incentives to sell Swiss francs.”
Switzerland’s currency was little changed at 1.20124 francs per euro as of 2:24 p.m. London time.
The franc yesterday appreciated through 1.2010 per euro for the first time since September 2012, when the SNB says it last sold its currency to enforce the limit. The cap has been breached only once since its implementation more than three years ago, when the franc strengthened to 1.19995 per euro on April 5, 2012.
The SNB’s Libor target has been at zero since August 2011. The central bank’s next policy decision is due on Dec. 11.
SNB Sight Deposits Rose Last Week Yielding Clue to Interventions
Sight deposits at the Swiss National Bank rose last week in a sign it may have intervened to defend its currency cap.
The average of sight deposits of domestic banks at the SNB rose to 320.7 billion Swiss francs ($331 billion) in the week ending Nov. 21, from 315.7 billion francs a week earlier, according to a statement on its website today. Sight deposits are cash-like deposits that commercial banks hold with the central bank. In the past, when the SNB intervene to defend its currency cap, lenders’ deposits at the central bank were credited with the amount of francs sold.
The Swiss currency hit a 26-month high versus the euro last week as investors bet the European Central Bank would enact more stimulus to boost inflation. The SNB set a ceiling of 1.20 francs per euro three years ago amid Europe’s sovereign debt crisis, using currency interventions to defend it. The franc’s strength last week led to speculation the SNB may have purchased euros after a two-year hiatus.
“Given what we’re seeing with the ECB, a much bigger wave of Swiss buying by euro-denominated investors is on the horizon,” said Peter Rosenstreich, head of market strategy at Swissquote in Gland, Switzerland.
SNB spokeswoman Silvia Oppliger declined to comment on whether it had started interventions again. History shows that it may take its time to communicate any actions: When it stopped buying currency to defend the franc in September 2012, it waited 13 months to inform the public.
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One of the most interesting examples of central bank intervention -- that has created some great opportunities for traders -- is the SNB's repeated statements, supported by actual intervention, to ensure EUR/CHF does not fall below 1.20.
As the chart above illustrates, there are some signs that the market may be forming a bottom after sharply declining. Moreover, the Swiss National Bank recently stated it is committing to defending 1.20 with intervention, if needed.
Do we have the signs in place to go long EUR/CHF?
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