Switzerland’s franc retreated from within 0.1 percent of the level at which UBS AG, the nation’s largest lender, says the central bank may step in to defend its cap on the currency.
The exchange rate had reached the closest it’s been to the 1.20-per-euro ceiling since September 2012, when the Swiss National Bank says it last sold the franc to enforce the limit.
The currency has strengthened before a Nov. 30 referendum that, if passed, would require the central bank to build its gold holdings as a proportion of assets to 20 percent, from 8 percent now. That risks making it harder for policy makers to control the exchange rate.
The central bank would have five years to build its gold reserves up to the required level if the proposal is affirmed. “The 2012 precedent suggests that the SNB might intervene and purchase euros at around 1.2010,” Beat Siegenthaler, a currency strategist at UBS in Zurich, wrote in a note e-mailed to clients dated yesterday.
That said, “the gold initiative appears to have low chances of success,” he wrote. The franc slipped less than 0.05 percent to 1.20303 per euro at 4:05 p.m. London time after strengthening to 1.20213. SNB spokeswoman Silvia Oppliger declined to comment when questioned on foreign-exchange market interventions.
The SNB’s cap was introduced more than three years ago to support Swiss exporters as investors sought the relative safety of the franc at the height of the euro area’s sovereign-debt crisis. It has only been breached once, when the currency appreciated to 1.19995 per euro on April 5, 2012.
Intervention Level
“When they were intervening during the euro-zone crisis we didn’t actually touch the 1.20 level apart from temporarily,” Jonathan Webb, head of foreign-exchange strategy at a unit of Jefferies International Ltd. in London, said in a telephone interview yesterday.
“Typically they were intervening between 1.2005 and 1.2010. If the referendum did pass it would make the SNB’s life much harder to sustain the floor.”
The implied volatility on one-month options for euro-franc climbed to 4.58 percent today, the highest since September 2013. To get the required gold, the central bank may need to sell foreign reserves, much of them in euros.
That selling would drive the euro lower versus currencies around the world, including the franc, threatening to break the currency limit. The law would also require the SNB’s gold reserves to be held within Switzerland, starting after two years, and prevent it from selling the precious metal.
“The ceiling of the Swiss franc versus the euro may well get tested,” Axel Merk, president and founder of the Palo Alto, California-based Merk Investments LLC, wrote in an e-mailed report today.
“Ceilings are enforceable only when they represent an unconditional commitment. As soon as someone blinks, the market will test the resolve of policy makers.”
bloomberg.com
The exchange rate had reached the closest it’s been to the 1.20-per-euro ceiling since September 2012, when the Swiss National Bank says it last sold the franc to enforce the limit.
The currency has strengthened before a Nov. 30 referendum that, if passed, would require the central bank to build its gold holdings as a proportion of assets to 20 percent, from 8 percent now. That risks making it harder for policy makers to control the exchange rate.
The central bank would have five years to build its gold reserves up to the required level if the proposal is affirmed. “The 2012 precedent suggests that the SNB might intervene and purchase euros at around 1.2010,” Beat Siegenthaler, a currency strategist at UBS in Zurich, wrote in a note e-mailed to clients dated yesterday.
That said, “the gold initiative appears to have low chances of success,” he wrote. The franc slipped less than 0.05 percent to 1.20303 per euro at 4:05 p.m. London time after strengthening to 1.20213. SNB spokeswoman Silvia Oppliger declined to comment when questioned on foreign-exchange market interventions.
The SNB’s cap was introduced more than three years ago to support Swiss exporters as investors sought the relative safety of the franc at the height of the euro area’s sovereign-debt crisis. It has only been breached once, when the currency appreciated to 1.19995 per euro on April 5, 2012.
Intervention Level
“When they were intervening during the euro-zone crisis we didn’t actually touch the 1.20 level apart from temporarily,” Jonathan Webb, head of foreign-exchange strategy at a unit of Jefferies International Ltd. in London, said in a telephone interview yesterday.
“Typically they were intervening between 1.2005 and 1.2010. If the referendum did pass it would make the SNB’s life much harder to sustain the floor.”
The implied volatility on one-month options for euro-franc climbed to 4.58 percent today, the highest since September 2013. To get the required gold, the central bank may need to sell foreign reserves, much of them in euros.
That selling would drive the euro lower versus currencies around the world, including the franc, threatening to break the currency limit. The law would also require the SNB’s gold reserves to be held within Switzerland, starting after two years, and prevent it from selling the precious metal.
“The ceiling of the Swiss franc versus the euro may well get tested,” Axel Merk, president and founder of the Palo Alto, California-based Merk Investments LLC, wrote in an e-mailed report today.
“Ceilings are enforceable only when they represent an unconditional commitment. As soon as someone blinks, the market will test the resolve of policy makers.”
bloomberg.com
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