Friday, August 19, 2011

Move to curb Swiss franc’s rise backfires

I posted about this the other day. Other countries are massively devaluing their currencies, but the fact that the Swiss franc is so more more valuable than other currencies is the fault of the...Swiss Franc, for being overvalued. By some kind of karma, efforts to devalue the Franc backfired, and it is now even more "overvalued".

    Financial Times -

    Traders shrugged off new measures by the Swiss authorities to stem demand for their currency, sending the Swiss franc sharply higher on Wednesday.

    The Swiss franc jumped 2 per cent against both the euro and the dollar in a matter of minutes, as traders ignored the Swiss National Bank’s decision to almost double the amount of liquidity available to the money market from SFr120bn ($152bn) to SFr200bn. The increase, which compares with “normal” liquidity levels of about SFr30bn, has lowered already rock-bottom interest rates and turned some short-term rates negative.While the Swiss franc pared some of its gains later in the session, in late New York trading it was still up 0.8 per cent against the euro at SFr1.1391 and 1.1 per cent against the dollar at SFr0.7886.

    “The measures taken thus far by the Swiss National Bank against the strength of the Swiss franc are having an impact. Nevertheless, the Swiss franc remains massively overvalued,” the SNB said.

    The Swiss government also announced that it would allocate SFr2bn to help consumers, exporters and the tourism industry, which have all been hit by the currency’s rise. “Measures ... are being examined and will be rapidly implemented,” the government said in a statement, but did not provide any details.

    Migros and Co-op, Switzerland’s two dominant retailers, this week removed some imported items from their shelves, after they said foreign suppliers had failed to lower prices adequately to reflect the franc’s rise.

    Many investors had expected the SNB to adopt tougher measures to weaken the franc, by either intervening directly in the market or even announcing a target rate for the currency against the euro. Last week Thomas Jordan, SNB vice-president, refused to rule out the implementation of a target rate, or currency peg, to rein in the franc, which has been driven higher as investors seek refuge from the eurozone debt crisis and fiscal worries in the US.

    “We think that today’s decision is an important indication that the SNB is still largely reluctant to intervene on the FX spot market,” said Valentin Marinov, FX strategist at Citigroup. “We maintain the view that an FX spot market intervention to keep the Swiss franc below a certain target ceiling is a measure of last resort for the SNB.”

    In its effort to protect Switzerland’s economic recovery, the central bank has racked up significant losses by selling the franc over recent years.

    Lena Komileva, global head of G10 strategy at Brown Brothers Harriman said the euro and dollar’s large falls against the Swiss franc, even as Swiss interest rates were pushed lower by the SNB, demonstrated ample pent-up demand for the currency. She added, however, that investors were likely to remain wary over further action form the SNB to weaken the franc.

    “Today’s surprisingly minimal announcement leaves some unused bullets in the SNB’s bag, including negative interest rates and capital controls,” Ms Komileva said. “This creates the risk that the SNB will ‘drip-feed’ the market with intervention rhetoric and measures over the coming weeks.”