Did The Swiss Miss?

Two bouts of heavy selling of the Swiss franc last Wednesday, each lasting only 30 minutes appears to have done the trick, sending currency speculators back under the rocks. The Swiss franc cheapened in to the weekend settling down at $1.0837 and against the euro at Chf1.5237. The dollar was unchanged while the euro shed 1%.

This marks the second time this year that the Swiss National Bank has made good on promises to suppress the strength of its currency. Two weeks ago SNB President Jean-Pierre Roth stated that "if we want to fight deflation, we have to stop a further appreciation of the Swiss franc." The global financial crisis set off demand for the Swiss franc, seen historically as a safe haven in times of stress.

However, the fact that Switzerland's gross domestic product is equally determined by what its manufacturers export means that when the world seeks refuge, demand for all things Swiss falls off the side of the Matterhorn. The SNB forecasts only two weeks ago that the economy will contract by 2.7% in 2009, making for the worst economic performance since 1975.

Traditionally the SNB has a great track record of maintaining price stability and so the Swiss have one of the lowest rates of consumer price inflation in the world. However, not in five decades have consumers been treated to the current 1% annualized pace of decline in shop prices. Faced with such declines will fail to attract investment going forward and could have nasty ramifications for growth ahead.

In March the SNB first sounded off about the strength of its franc and shortly afterwards bought euros in exchange for francs. This worked, but possibly for less than a week. The euro quickly lost ground as speculators tried to force the SNB into action again. It was simply one-way traffic for the market as the SNB sat on its hands.

Yet the ferocity of last Wednesday's intervention has clearly burnt the hands of those same speculators who as yet have failed to come back for more. This round of intervention included the dollar, which some say may have widened the impact by drawing more attention to the intervention.

Central banks often fail to make their mark when it comes to intervening. On occasions when a currency becomes weak and subject to selling from everyone, the bank can only do so much to mop up excess supply and dealers often see the opportunity to unload their holdings of the losing currency or worse still to sell short to the central bank. When currencies are strong, they also tend to be so for a reason and what the central bank often fails to do is change the fundamental reason.

In the case of the Swiss, the purpose of the intervention should be to undermine the prospects of the Swiss franc as a safe haven and so hurt speculators as pent up demand turns tail.

Did the Swiss miss? In the short term the SNB scores an A+ for its efforts in budging down the franc. But in the medium term, it's likely that investors will once again incite speculation by trying to find out how deep its pockets really are.

Supreme Council of the Secret Order of Jurojin