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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 DK - Vestergade 8-16 DK - 8600 Silkeborg 400 350 300 250 FX analyst Kristian Foged Schmidt +45 89897096 Kristian.schmidt @jyskebank.dk 200 150 100 50 0 Translation: Translation Services 03 04 05 06 07 08 09 10 11 12 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 Jyske Bank has prepared procedures to prevent conflicts of interest. These procedures have been 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 interests in the instruments for which such reports are prepared. The analysts receive no payment from persons interested in individual research reports. Read more about Jyske Bank's policy on conflicts of interest at www.jyskebank.dk/terms Risk FX, money market and/or commodity investment involves risk. Movements in the credit market, 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. All prices stated are the latest trading prices at the time of the release of the research report, unless otherwise stated.