A week is a long time in currency markets. Seven days after the Swiss National Bank announced a set of measures to curb the franc’s rise, it is at it again.
Analysts were unconvinced last week’s measures would work. They are sceptical this time around too. It is also unclear what other policy options the central bank has.
The SNB said this morning that it was injecting another Sfr40bn-worth of liquidity by expanding banks’ deposits held at the central bank. It would also conduct foreign-exchange swap transactions in a further bid to increase Swiss franc liquidity. The move came after the franc shot up by – at one point – more than 6 per cent on Tuesday after the Federal Reserve’s committed to keep rates on hold for the next two years, though the Swiss authorities were already considering action.
The actions last week, when the central bank injected Sfr50bn, managed to fulfil the objective of pushing the target rate “as close to zero as possible” – the three-month Libor has dropped from 0.175 per cent to 0.09 per cent. However, money market rates were never the driver of the appreciation. The franc is strong because fears over eurozone and US sovereign debt have stoked investor panic. This from Brown Brothers Harriman’s Lena Komileva:
The franc’s rise is a symptom of investors questioning whether the policy safety net that calmed markets after the collapse of Lehman Brothers is sustainable.
In such uncertain times, cash is king. And when cash is king, more liquidity is never likely to be enough of a deterrent to speculators.
So what can the SNB try next? There are mixed views on whether currency intervention would stem the tide, with sceptics arguing that the central bank has far too little FX firepower to ward off speculators.
A tax on foreigners’ Swiss franc deposits would be difficult to police for non-resident banks, and was tried – and failed – as a policy option forty years ago. From the FT’s Peter Garnham:
The levy was repeatedly used to stem the flow of foreign capital into Switzerland in the 1970s as investors sought refuge from stagflation. Those attempts to weaken the franc largely failed and it remained attractive, given the restrictive monetary policy of the SNB then.
There is more optimism, however, that cooperation between the major economies of the sort seen after the Japanese earthquake and tsunami in March to counter the yen’s strengthening, could work.
Is such an option justified?
The G-7 said then:
As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.
Surely an appreciation of 6 per cent over a single trading day counts as volatile. But Switzerland is not a member of the G-7, or the G-20. It has not suffered a natural disaster. And a weak dollar and euro would be welcomed by policymakers in the US and the eurozone. Unless a disorderly depreciation of the franc and dollar looked a possibility, then there is little motivation for concerted action.