Franc Defenders Who Beat Gold Bugs Face ECB Threat: Currencies

This content was published on November 30, 2014 - 17:36

(For a Currencies column daily alert: SALT FXCOL.)

Nov. 30 (Bloomberg) -- Switzerland has sidestepped the threat to its franc posed by the referendum on gold reserves. Now the focus turns to containing the fallout from the European Central Bank’s stimulus program.

Voters rejected a proposal to require the Swiss National Bank to keep at least 20 percent of its assets in gold, up from 8 percent now. To get the bullion, the central bank may have needed to sell foreign reserves, and since much of them are in euros, that would have risked weakening the 18-nation currency and putting the franc’s 1.20-per-euro cap under pressure.

While that prospect has been averted, strategists say the ceiling will continue to be menaced by speculation the ECB is preparing to expand the supply of euros with purchases of government bonds, which would debase the common currency. The franc rose to a two-year high of 1.2009 per euro on Nov. 19, and has remained within 0.3 percent of the cap ever since.

“The pressure on the peg won’t vanish just because they vote no,” Kit Juckes, a strategist at Societe Generale SA in London, said before the result was announced. “There’s a very low probability that it does anything more than a very small bounce in euro-Swiss. The pressure won’t go away until euro- dollar has troughed, and I don’t believe that we’re anywhere near that happening.”

Anticipating Gains

Traders are protecting against further gains in the franc. They paid a 1.64 percentage-point premium on Nov. 28 for three- month options to sell the euro versus the Swiss currency relative to contracts allowing for purchases. That’s up from zero on Oct. 31 in the biggest monthly increase in 2 1/2 years, data compiled by Bloomberg show.

The franc appreciated steadily against the euro as the “Save Our Swiss Gold” referendum campaign intensified at the same time as ECB quantitative-easing bets picked up. It ended last week at 1.20215, 1 percent stronger since June.

The gains took it closer to breaking through the cap than at any time since September 2012, when the central bank says it last intervened in currency markets to defend the threshold.

SNB President Thomas Jordan warned earlier this month that the gold plan, which would also have blocked sales of bullion reserves and required them to be held in the country, would encourage traders to speculate against the central bank. The campaign boosted trading in Switzerland’s currency, with volumes against the euro and dollar higher in the week ending Nov. 21 than they have been 90 percent of the time in the past five years, according to Deutsche Bank AG.

Swiss Verdict

The referendum, proposed by members of the Swiss People’s Party SVP, was rejected by 77.3 percent of voters, the Swiss government said on its website. Polls had forecast the initiative’s rejection.

“The rejection is well expected and the market will swiftly shift the focus to ECB/SNB policies,” said Yujiro Goto, a currency strategist in London at Nomura Holdings Inc. “Market expectations for sovereign QE” from the ECB should put pressure on the euro-franc currency pair over the next six months, Goto said. Nomura doesn’t expect the cap to be breached, he said.

The SNB imposed the ceiling in 2011 as an exodus from euro assets strengthened the Swiss currency and raised the prospect of deflation. It has been pierced only once, in April 2012, before the SNB bought euros to nudge the franc back below 1.20.

The chances of the franc breaching the ceiling this year rose to almost 90 percent at the end of last week, from 53 percent on June 30, options data compiled by Bloomberg show.

Important Test

Policy makers say they’ll defend the franc’s ceiling. SNB Governing Board Member Fritz Zurbruegg said in a speech in Geneva on Nov. 20 the central bank is prepared to purchase unlimited amounts of foreign currency and may take additional measures, including introducing negative interest rates.

The SNB said in a statement on its website today that it will enforce the cap with the utmost determination and is prepared to take further measures immediately.

“If the referendum is unsuccessful, we’ll be more confident the floor will continue to hold,” Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd., said before the result was announced. “If the ECB adopts sovereign-debt purchases, it will likely weigh on euro-Swiss, but the gold vote is likely to be more important as a potential test of the floor.”

Speculation policy makers are already intervening to weaken the franc underlines that “the SNB is behind the 1.20 floor and will not let it go, no matter what comes out of the Nov. 30 referendum,” Ipek Ozkardeskaya, an analyst at Swissquote Bank SA in Gland, Switzerland, wrote in a Nov. 26 client note.

Euro Drop

Their resolve may be tested by the ECB’s actions. The central bank has already introduced negative deposit rates, started buying asset-backed securities and covered bonds, as well as offering longer-term loans to banks. ECB President Mario Draghi said Nov. 18 that euro-region policy makers may start sovereign-debt purchases.

With the euro forecast by strategists to weaken versus all but two of its 16 major peers by the middle of 2015, the SNB will have its work cut out. The euro has dropped about 9.4 percent against the dollar this year.

“If the ECB is about to start a huge round of QE in the next couple of weeks and months, that’s bound to put upward pressure on the Swiss franc,” Jon Cox, the head of Swiss equities at broker Kepler Cheuvreux in Zurich, said Nov. 28 in a Bloomberg Television interview. Swiss policy makers will face a “tricky situation,” he said.

--With assistance from Stefania Spezzati in Milan and Zoe Schneeweiss in Zurich.

To contact the reporters on this story: Lucy Meakin in London at; David Goodman in London at; Eshe Nelson in London at To contact the editors responsible for this story: Paul Armstrong at Paul Dobson

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