SNB reserves jump as euro crisis forces central bank to defend floor

SNB stockpiles rose by SFr68 billion in May to SFr304 billion, as renewed concerns about the future of the euro forced the central bank to intervene, and EURUSD finally broke out of the tight range that it held for the first few months of the year and put pressure on EURCHF. Indeed, for the past few weeks, EURCHF has in effect been pegged just above its SFr1.20 floor, as investors have sought the relative safety of the franc.

The figures highlight the extent of capital flight into Switzerland that has been noted by many market participants since the eurozone debt crisis deteriorated last month.

That came after inconclusive Greek elections raised the prospect that Athens might reject austerity measures, imposed by the International Monetary Fund and its eurozone partners, and leave the single currency, and has been exacerbated by renewed fears over the Spanish banking system.

The rise was the third largest monthly increase in SNB reserves in its history.

The largest increase took place in May 2010, just before the SNB abandoned a costly and unsuccessful attempt to rein in the value of the franc between 2009 and 2010, when it was being pushed higher as a result of the first wave of the Greek debt crisis.

Then, domestic criticism forced the SNB to give up on its intervention policy after it racked up a loss of almost SFr20 billion as a result of its campaign.

Some believe the SNB will find its decision to defend the floor “with all means possible” equally untenable this time around, and point to evidence it has been diversifying away from the euro as a sign that it is losing confidence in its decision to maintain the floor.

However, Paul Robinson, head of FX strategy at Barclays, argues the situation is different now.

He does not dispute the claim that the SNB would not be willing to intervene at this rate indefinitely. “But it is crucial to bear in mind the circumstances,” says Robinson. “Yes, the intervention is unsustainable but the situation in the euro area is also unsustainable.”

He says during any period of heightened, but temporary, uncertainty there is an option value in postponing decisions which would be difficult to reverse, given that if the floor were to be abandoned it would be in effect impossible for it to be re-instated.

“Its relative success so far depends a lot on the forceful way the SNB has spoken about it, and the credibility it has gained that it will defend the floor come what may,” says Robinson.

“That would be immediately destroyed. Instead, the SNB would be faced with the problem of stabilizing an economy in a highly volatile environment where its main trading partner is going through a huge crisis and its exchange rate has suddenly appreciated significantly.”