New Swiss Currency Peg

With the Forex world still licking its wounds after the Swiss National Bank removed its currency peg it appears as though there will be a new Swiss currency peg! CNBC asks in a published article, if the Swiss have adopted a new currency peg?

There is growing speculation that the Swiss National Bank (SNB) has set a new target for the country’s currency, as the Swiss franc continues to tick lower against the euro.

Swiss newspaper Schweiz am Sonntag reported Sunday that the SNB was aiming to keep the Swissie trading between 1.05 – 1.10 euros ($1.19 – $1.24), citing sources with knowledge of the situation. It comes after the SNB shocked markets by dropping its three-year-old peg of 1.20 Swiss francs per euro on January 15.

The Swiss franc rose briefly forty percent versus the Euro when the central bank announced that it would no longer maintain a currency cap in relation to the Euro. The franc almost immediately retreated to the thirty percent range and has steadily fallen to where today it stands at twelve percent higher versus the Euro than before the cap was removed. Now it appears that after a brief period of allowing the franc to float unhindered the central bank is going to resume currency manipulation.

A Trading Band Instead of a Cap

Speculation now has it that the Swiss National Bank will allow the franc to trade within a narrow band between 1.05 to 1.10 to the Euro. The bank itself makes no comment.

Swiss Sunday paper Schweiz am Sonntag reported the SNB was now unofficially targeting a trading band with the euro between SFr1.05 and SFr1.10, citing a “well-informed source”.

“We believe that the central bank will continue to intervene in the forex markets as it has suggested in previous statements and, according to press reports, the SNB would tolerate losses of up to SFr10bn,” analysts at Morgan Stanley said.

The central bank would not comment but data on Monday showed that bank deposits with the central bank rose last week, adding further fuel to speculation the SNB has been engineering the franc lower since January 15.

Interestingly the central bank increased the value of its franc holdings by taking off the cap and now is using those more-valuable assets to cap the franc again. For traders the new floating Swiss currency peg will slide up and down and may make it harder for traders to guess where the bank will intervene next.

Whither Goes the Euro

The Euro is the problem the Swiss. Two thirds of Swiss exports go to the Euro Zone. A too-expensive franc hurts exports and the Swiss economy. And a too-high franc threatens deflation. The EU is starting a quantitative easing program to stimulate a sluggish economy and this program of printing money will drive down the value of the Euro. To the extent that the Swiss want to maintain a fixed point versus the Euro they would need to spend more than they have in buying Euros to keep the ratio in check. This in a nutshell is why they took off the fixed cap. The Business Insider writes about Europe’s QE (quantitative easing).

In Northern Europe, especially Germany, the European Central Bank’s decision to embark on quantitative easing (QE) has triggered an avalanche of indictments. Judging by the criticism, one might consider zero inflation a blessing. But if that were true, central banks around the world would have set it as a target long ago. Instead, all of them define price stability as low, stable, but positive inflation.

That is because zero inflation has three overwhelmingly negative consequences. First, it erodes the effectiveness of standard monetary policy (because if interest rates went much below zero, depositors would withdraw cash from banks and put it in safes). Second, it makes relative wages (of, say, manufacturing versus services employees) more rigid, because wage contracts are generally set in euro terms. And, third, it increases the burden of past debts and makes exiting from a private or public debt crisis even more painful.

So, the EU needs quantitative easing and Switzerland needs to protect its economy and currency. Thus there is a new sliding Swiss currency peg.