Swiss National Bank

National daily Jornal de Negocios reports that Portuguese debt ceased to be accepted by the Swiss National Bank as collateral in January 2009. The basic story has been confirmed by the FT, and an article will be published shortly with details (linked when available). It is unclear at present what types of debt have been excluded and for what purposes.

This will be a further knock to confidence in Portugal, a country facing high and increasing costs of debt, which needs to raise more debt in the near future. Yields on Portuguese government bonds – a proxy for the country’s cost of debt – today touched 7.125 per cent in intraday trading today, close to peaks during Ireland’s crisis.

The financial impact should be small since the exclusion seems to have been in place for a year, but given the febrile state of the markets, the psychological impact could be significant. The SNB’s move might prompt further credit rating downgrades, which would make debt even more expensive for the government and could imperil the debt’s eligibility elsewhere. Recent downgrades have left Moody’s, S&P and Fitch ratings for sovereign debt at A1, A- and A+, respectively. Moody’s A1 rating is roughly equivalent to A+, but the rating is on review for downgrade. Read more

The Swiss National Bank no longer accepts Ireland’s government bonds as eligible collateral in its repo operations. It’s probably not earth-shaking for holders of Irish government bonds, following earlier margin calls on these assets by LCH.Clearnet last year. On the other hand, it’s an interesting window into how at least one European central bank is taking care over its collateral, unlike a few others we could mention.

Modifications to the SNB’s collateral baskets over the last year emerge in this little spreadsheet (Excel file). Several other Irish-domiciled assets also became nicht Repo-fähig in late December 2010, around the time Ireland lost its last AA- credit rating. Anglo Irish medium-term notes, Depfa bonds, etc.

The SNB’s eligible collateral criteria require that securities posted for repo have this AA- rating and that their country of domicile also bears the same rating, which seems open and shut. Until you read that the bank can make exceptions for sovereign securities rated below AA-.

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Merry Christmas, banks. If you start running low on dollars in the new year, your central bank will now be able to access the greenback via currency swaps just extended by the Federal Reserve. For several countries, anyway.

Temporary swap agreements, set up most recently in May with the ECB, BoE, BoJ, SNB and Bank of Canada, were due to expire in January but have now been extended to August 1, 2011. These agreements allow a central bank to receive dollars in return for their own currency, which are then converted back at the same exchange rate at a later day (be it overnight or up to about three months). It’s a liquidity-providing, cash-crunch-prevention measure.

The swap lines are essentially unused at present. Only $60m is outstanding. So why extend? Robin, who’s writing on this for the paper as I type, says the move clearly reflects concerns about Europe. That would explain the curious coincidence of a BoE-ECB swap being set up on Friday (specifically to provide sterling to Ireland). Read more

For the first time since records began, core prices are falling in Switzerland. Core inflation, which excludes food, drinks, tobacco, seasonal products, energy and oil, recorded a 0.1 per cent drop during October, according to official data, the first fall since at least 1994. Swiss interest rates are expected to remain on hold into at least Q3 2011.

Consumer price inflation for the year was slightly below expectations, with prices rising 0.2 per cent year-on-year. The Swiss central bank has warned that overall inflation could also turn negative next year, but Citi analysts don’t think the country risks prolonged and harmful deflation: Read more

UBS, one of Switzerland’s leading banks, has predicted the Swiss National Bank will deliver a 25 basis point rise in interest rates at its policy meeting on Thursday, contrary to a virtually unanimous consensus among other observers for unchanged rates. UBS expects the SNB to switch back to targeting the mid-point of a three-month Swiss franc interbank lending rate band of 0 per cent to 1 per cent, from the current target rate of 0.25 per cent.

The call came despite the Swiss franc hitting parity against the dollar for the first time in 10 months on Tuesday, and as the franc threatened to notch up a fresh record high against the euro after scaling a succession of all-time highs against the single currency in recent weeks. Read more

The Swiss franc is close to record highs against the euro, trading today at 1.3103, just shy of July’s record high of 1.3070.

Location and stability are giving the currency a double boost, say analysts. Read more

The Swiss National Bank may have suffered paper losses of up to SFr10bn (€7.5bn) from huge interventions in the currency markets to restrain the value of the franc.

The central bank is expected by market observers to report a big loss when it publishes second-quarter accounts in mid-August. Economists cannot make a precise forecast, as the SNB does not reveal when, or at what rates, it has sold francs and bought other currencies – mainly euros – in recent months. However, Martin Neff, chief economist of Credit Suisse, said: “It’s certain there will be a big loss.” Read more

Canada’s is the third central bank in a week to cite increased downside risks to the economy. “The overall level of risks to Canadian financial stability has increased” in the past six months said the Bank of Canada’s financial stability review. Read more

Expect a stronger Swiss franc: the central bank has dropped a key phrase about countering “excessive appreciation” of its currency after several hints (see 1,2). Forex interventions by the SNB are rumoured to have been numerous (see 1,2,3 to name but a few) – but with the euro falling, the franc has been rising in spite of them.

The table below compares today’s monetary policy assessment with its immediate predecessor in March, highlighting key differences. In a nutshell; the franc reference has gone; growth and inflation forecasts are up; as are ‘downside risks’ following the shenanigans in the eurozone. Table after the jump: Read more

Investors may wonder why the euro is not trading even lower given the almost universal bearish sentiment on the single currency. The answer could lie in Switzerland.

The Swiss National Bank shocked the market on Tuesday by announcing that, as a result of its intervention in the foreign exchange markets, its currency reserves leapt more than 50 per cent last month from $145.6bn in April to $261.9bn in May. Read more

From FT Alphaville

Here’s a timely working paper from the BIS.

It’s a 91-page review of liquidity provisions during the financial crisis, including the multitude of currency swap lines initiated by the globe’s central banks. It’s timely because last month the Federal Reserve restarted its swap lines to help ease strains in short-term US dollar funding markets in Europe.

In late 2008, right before the collapse of Lehman Brothers, the Fed also upped its dollar lending to other central banks to help boost liquidity. So far, the Fed’s latest facility has extended a little over $10bn. In 2008, it provided a whopping $554bn in USD funding. And here’s where things get interesting.

From the paper:

Much of the sudden demand for dollar funding in international markets immediately after Lehmans’ failure appears to have resulted from the drawing of dollar funds by commercial banks in the USA from their related foreign offices.

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James Politi

One of the more curious elements of the Federal Reserve’s announcement on Sunday night regarding the re-establishment of dollar liquidity swaps with foreign central banks was that the Bank of Japan was not on the initial list of counterparties. But the Fed did say that the BoJ would consider “similar measures soon”.

Indeed it did. Twelve hours later, the BoJ approved its participation in the swaps. Like all the counterparties except the Bank of Canada, which is capping the size of its facility at $30bn, the Bank of Japan has placed no upper limit on its size. But like the Bank of Canada, the BoJ is not expecting to start currency swap operations this week, as the Bank of England, Swiss National Bank, and European Central Bank are expected to do.

One Swiss franc can buy more euros than at any time since the launch of the currency in 1999. At 15.47 today, the currency traded at 1.4309, breaking its previous record of 1.4315 reached in October 2008.

Significant strengthening occurred last week, following comments from central bank board member Jean-Pierre Danthine. Read more

Rumours and anecdotal evidence of a shift in Swiss currency policy have been backed up by the comments of a Swiss National Board member. Read more

Expect greater collaboration between the central bank and regulator in Switzerland. They have signed a memorandum of understanding saying they will work more closely together in future.

The two bodies worked more closely during the financial crisis, and fell in love found some common ground. Principal changes/ how it will workRead more

Is the Swiss National Bank allowing its currency to appreciate?

It may be coincidence, but the three previous times we reported rumours of bank intervention in the forex markets, the level at which they appeared to intervene was about 0.684 EUR per CHF (1, 2, 3). Read more

The Swiss National Bank has issued a characteristic response to questions of market intervention to weaken the Swiss franc: “We’re not commenting on that,” a spokesman told Reuters. Some traders had reported market activity by the bank, although it’s not conclusive from the chart when compared to the spike last Tuesday, when similar rumours were reported.

Traders say the Swiss National Bank was seen in Asian markets selling francs and buying euros. This would fit with Phillip Hildebrand’s stated policy of intervention to prevent excessive appreciation of the franc, which could harm Switzerland’s economic recovery. The SNB declined to comment. (Reuters)

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The Swiss franc has dropped 0.2 per cent amid speculation that the central bank sold the currency for the second time today. The central bank refused to comment. It is thought the francs bought euro.

The Swiss franc has been appreciating significantly against the euro. New central bank governor Philip Hildebrand has a stated policy of intervention where necessary to prevent ‘excessive appreciation’ of the franc, which has risen by 0.9 per cent against the euro since the start of the year. Read more

The Swiss central bank has declined to comment following reports that it sold swiss francs for euros in a rare foray into Asian forex markets. The euro had been under downward pressure because of sovereign debt fears in several member states, hitting a 15-month low directly before the intervention. The Swiss National Bank has a stated policy of intervention to weaken the swiss franc while the threat of deflation persists.