Switzerland reported that its currency reserves soared by SFr66 billion in May. That rivals the increase seen in the summer of 2011 before the Swiss National Bank (SNB) introduced the SFr1.20 floor for EURCHF.
| SNB reserves soar as pressure builds on EURCHF |
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| Source: BCA Research |
The main reason, he says, is that deflation persists in the Swiss economy – the consumer price index fell 1% year-on-year in May, the eighth consecutive month of falling prices.
“With no immediate inflation threat, the SNB can continue to print Swiss francs,” says Kalirai.
“Aside from intervention, policymakers can also introduce administrative measures, such as a tax on foreign deposits, to slow the capital inflows.”
In addition, he says allowing the floor to give way will invite greater safe-haven flows from the eurozone and greater market speculation.
“Thereafter, any future attempt by the SNB to control the exchange rate will only bring about immediate speculative attacks,” says Kalirai. “Smelling blood, the goal of currency traders will be to break the SNB.”
That would result in even higher currency volatility to the detriment of the Swiss economy.
“Several months of aggressive intervention will sow the seeds for higher Swiss inflation,” says Kalirai.
“As inflationary pressures build, the SNB will eventually have to relent on the exchange rate. However, this is unlikely to happen over the next three to six months.”