SNB Throws Estimated CHF 63 Billion and Kitchen Sink at Currency Peg but Pussyfoots around Inflation
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For anyone watching the FX markets, there are some notable developments in the exchange rate between the EUR/CHF. The price of the EUR/CHF has traded within a very tight range around 1.20 since the beginning of the year. Mind you, the stable price in EUR/CHF is not a natural phenomenon and it is a direct result of intervention in the FX market by the Swiss National Bank. The SNB has pledged to defend the 1.20 level at any and all costs, and so far they have been successful. Without SNB support, the value of the CHF would be significantly higher compared to the EUR, especially considering money flows out of peripheral countries in the Euro area.
Today the SNB released its May balance sheet, which details the central bank's intervention operations. The Banks FX intervention increased to a whopping 62.9 billion CHF. However, as was pointed out by analysts at JPMorgan, this amount is somewhat misleading since it was'‘sterilized'. In other words, the SNB only expanded their monetary base by 33 billion CHF despite the huge interventions.
Analysts at JPMorgan estimate actual intervention in June could total 100 billion CHF, although the net effect on liquidity would only be 50 billion CHF. So, why sterilize and what are the affects? JPMorgan analysts put it this way.
"Unfortunately, the SNB cannot isolate the economy from the effects of its exchange rate peg – for the peg to work the SNB has to be willing ultimately to create inflation (through the channel of unlimited liquidity creation); and if it is unwilling to create unlimited liquidity and inflation then peg cannot endure. This then is the significance of today’s data – in partially sterilizing its FX intervention; the SNB is partially undermining the very credibility of its currency peg."
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Today the SNB released its May balance sheet, which details the central bank's intervention operations. The Banks FX intervention increased to a whopping 62.9 billion CHF. However, as was pointed out by analysts at JPMorgan, this amount is somewhat misleading since it was'‘sterilized'. In other words, the SNB only expanded their monetary base by 33 billion CHF despite the huge interventions.
Analysts at JPMorgan estimate actual intervention in June could total 100 billion CHF, although the net effect on liquidity would only be 50 billion CHF. So, why sterilize and what are the affects? JPMorgan analysts put it this way.
"Unfortunately, the SNB cannot isolate the economy from the effects of its exchange rate peg – for the peg to work the SNB has to be willing ultimately to create inflation (through the channel of unlimited liquidity creation); and if it is unwilling to create unlimited liquidity and inflation then peg cannot endure. This then is the significance of today’s data – in partially sterilizing its FX intervention; the SNB is partially undermining the very credibility of its currency peg."
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