Download CHF: Is the minimum rate in danger?

CHF: Is the minimum rate in
danger?
•
We expect that EURCHF will stay at about 120 for the next year or so.
•
Since April, the SNB’s currency reserves have skyrocketed by CHF 170.
The reserves now amount to 65 % of GDP.
•
It is very unlikely that the SNB will stop defending its minimum
exchange rate.
Our expectation:
We still expect that EURCHF will trade at about 120 over the coming years or so
(read the most recent research report here). It cannot be ruled out that we may
see a few increases, but we do not expect the rate to go higher than 122-123.
We do not expect that the SNB will abolish the minimum rate (at least not in the
coming twelve months), and we do not expect that the minimum rate will be
raised from 120 to 125.
We do, however, still emphasise that there is definitely a risk that the minimum
rate will be given up. Whether the risk is the highest in the short or the long
term is, however, uncertain. In the short term, an early exit would limit the
losses of the SNB. In the long term, an exit may prove to be close to inevitable
due to a massive inflow of capital (for instance, if the euro collapses).
The
spring saw a fierce political debate in the Swiss media – and it may easily be
flare up again.
Switzerland: SNB’s currency reserves (CHFbn)
450
Publisher:
Jyske Bank
Jyske Markets
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DK - 8600 Silkeborg
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FX analyst
Kristian Foged Schmidt
+45 89897096
Kristian.schmidt
@jyskebank.dk
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Translation:
Translation Services
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04
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Source: Reuters EcoWin
Disclaimer:
Please see the last page.
Accumulation of reserves not a game changer
After the release of the most recent data on currency reserves issued by the
Swiss National Bank (SNB), our clients ask to an increasing degree whether the
Swiss minimum exchange rate defended by the SNB is in danger. The brief
answer to that question is ‘No … at least not yet’.
The fact that the SNB’s currency reserves are increasing is not necessarily an
indication that there is a risk that the minimum rate will be abolished. As a
Our
recommendation
investors with loans in CHF
to
Our recommendation is practically
unchanged
–
we
do
not
recommend loans in CHF. CHF is
no longer more attractive as a loan
currency than EUR, JPY, USD, DKK,
etc. as the interest rate is low for
matter of fact, if the SNB ceases to intervene and abolish the minimum exchange
all the above currencies. Loans in
the SNB will face large losses on its currency reserves. The reason for this is that
speculation.
rate, higher reserves will have the result that (at least in the present situation)
CHF will strengthen. If, for instance, CHF strengthens by 15% against EUR and by
10% against the other currencies included in the reserves (a conservative
estimate), the value loss will be about CHF 50bn (about 9% of GDP). This loss on
the reserves may increase as the reserves grow higher, and if CHF strengthens
even more. All other things being equal, the prospects of large losses will
strengthen the SNB’s incentive to maintain its current policy, and the SNB has
the means to do so – it is already warming up the printing press to print bank
notes.
Last but not least, it should not be forgotten that abolishment of the minimum
exchange rate will also affect the economy in the form of lower exports, risk of
further deflation and possibly lower private consumption, etc.
The minimum exchange rate very much conflicts will the
development of fundamentals
CHF
compare
consider their various possibilities.
There are no indications that CHF
is about to weaken, but on the
other hand there is still a risk that
the minimum rate will be abolished
and CHF will strengthen massively.
Sufficient strength to resist major
losses:
Consider whether the risk should
be hedged in the forward or the
options market. Consider to close
the loan and switch into DKK. No
matter
investors
doing incredibly well compared to the rest of Europe. We may actually imagine
a
the situation that to an increasing degree some countries will take a critical view
of the situation if the SNB continues to buy their currencies and therefore keep
them at strong levels.
Swiss politicians and economists maintain that CHF is strongly overvalued, yet
the development of fundamentals does not agree with that. It is true that
according to the purchasing power parity, CHF is overvalued, yet economic
growth and the surplus on the current account give different signals. As a
matter of fact the current-account surplus was well above 10% of GDP.
currency
Hence borrowers should carefully
One thing that one should bear in mind and that may increase the surrounding
world’s pressure on Switzerland is that the Swiss economy is, as a matter of fact,
to
what,
to
we
define
recommend
a
clear
stop/loss and to place an order. As
minimum,
investors
SHOULD
place a stop/loss order at 118-119
for EURCHF (626-631 for CHFDKK).
Not the sufficient strength to resist
losses:
Based on a risk assessment, we
recommend investors to close their
funding.
So
far,
we
have
recommended a stop/loss, but due
to the uncertainty as to when, in
actual fact, it will be executed, we
recommend to close down and
eliminate risk (a S/L at 119.75
might be executed at 115 or
thereabout due to big gaps in
liquidity).
Switzerland: Current account (% of GDP)
17,5
15,0
12,5
10,0
7,5
5,0
2,5
0,0
99
01 02 03 04 05 06 07 08 09 10 11 12
Source: Reuters EcoWin
There is a risk that the extensive injection of liquidity into the economy caused
by the currency intervention (the SNB injects massive amounts of CHF into the
economy) will result in credit and housing bubbles, and hence it constitutes a
risk to financial stability in Switzerland (particularly in the long term).
Nonetheless, the SNB focuses on inflation (currently deflation), and there are no
indications that the SNB will begin to look to the surrounding world or other
indicators until the inflation rate begins to increase again. If the SNB chooses to
abolish the minimum rate, it will presumably introduce capital control, negative
deposit rates or similar measures as a kind of counter reaction.
Worth keeping an eye on…
One thing is for sure – the SNB cannot be trusted. The SNB will state that it
maintains the minimum rate yet only until it does not do so anymore, and there
will be no ‘wavering’ (‘wavering’ will only lead to the risk of a speculative
pressure).
It will, over the coming months and quarters, be interesting to follow the
development of the currency reserves of the SNB, for which data are released
once a month. If the reserves continue to grow by about 10% a month, such a
development will definitely cause concern at the SNB. The next currency reserve
announcement will take place on 7 September.
Moreover, the SNB announces once every quarter (next time on 30 October)
which currencies that make up the reserves. This is primarily interesting in
respect of other currencies as this offers knowledge as to which currencies the
SNB buys and hence which currencies are supported by the SNB if the
development continues.
CHF-positive triggers
•
Higher economic growth and inflation in Switzerland
•
Greece, Spain, Italy exit the euro zone
•
Poor global growth indicators
•
Escalation of the crisis in Syria/the Middle East
•
Hard landing in China
CHF-negative triggers
•
Introduction of negative deposit rates
•
Capital control
•
Increase of the minimum rate (which we consider unlikely)
•
ECB purchases will reduce the risk on EUR assets and reduce the
pressure on CHF
•
QE3 in the US
Disclaimer & Disclosure
Jyske Bank is supervised by the Danish Financial Supervisory Authority.
The research report is based on information which Jyske Bank finds reliable, but Jyske Bank does
not assume any responsibility for the correctness of the material nor any liability for transactions
made on the basis of the information or the estimates of the report. The estimates and
recommendations of the research report may be changed without notice. The report is for the
personal use of Jyske Bank's customers and may not be copied.
This is a recommendation and not an investment report.
Conflicts of interest
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incorporated in the business procedures covering the research activities of Jyske Markets, a
business unit of Jyske Bank.
Jyske Bank's FX, money market and commodity analysts may not hold positions in the instruments
for which they prepare research reports, but Jyske Bank is permitted to hold positions and/or have
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Risk
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the sector and/or the news flow, etc. regarding the issuer may affect the exchange rate/the
interest rate/the price of the commodity. See the front page of the research report for our view of
the risk associated with the currency/interest rate/commodity investment. The risk factors and/or
the sensitivity calculations stated in the report should not be regarded as exhaustive.
Update of the research report
Analyses, recommendations, and ad hoc publications are not updated. A new publication will
instead be published if and when it is found necessary. Market comments are updated daily.
See the front page for the initial date of publication of the report.
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