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Snap AV: The SNB and Le Pen

Summary:
Credit Suisse ask an interesting question: What lies in store for the Swiss Franc if a President Le Pen were to emerge on May 8th?Volatility in polling alone has to make the question worthwhile, particularly since Switzerland is once again, in the words of CS, feeling a bittersweet pinch from the franc’s reputation as a relative ‘safe haven’ currency.Do remember the SNB let their currency floor go in 2015 and as the FT noted on Tuesday, FX reserves have hit a fresh record high after two months of declines. Chances are, if Le Pen wins and risk spikes, that will only get more… painful? As CS argue:Although recent political surprises like the UK referendum and Trump’s election come to mind, a more appropriate episode for comparison might be fears of Eurozone breakup between 2011-12. At that

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Credit Suisse ask an interesting question: What lies in store for the Swiss Franc if a President Le Pen were to emerge on May 8th?

Volatility in polling alone has to make the question worthwhile, particularly since Switzerland is once again, in the words of CS, feeling a bittersweet pinch from the franc’s reputation as a relative ‘safe haven’ currency.

Snap AV: The SNB and Le Pen

Do remember the SNB let their currency floor go in 2015 and as the FT noted on Tuesday, FX reserves have hit a fresh record high after two months of declines. Chances are, if Le Pen wins and risk spikes, that will only get more… painful? As CS argue:

Although recent political surprises like the UK referendum and Trump’s election come to mind, a more appropriate episode for comparison might be fears of Eurozone breakup between 2011-12. At that time, appreciation pressures on the franc were so strong that the SNB resorted to establishing the EURCHF1.20 minimum exchange rate, whilst also intervening through unconventional instruments such as FX swaps. In fact, we believe the situation now is even more complicated than in 2011, because several new ideas appear to be on the SNB’s wish list that were not present in 2011. The SNB now seems to want to simultaneously:

1. Achieve its traditional objectives, such as avoiding deflation, disorderly exchange rate moves and CHF overvaluation.

2. Maintain a sufficiently wide interest rate differential against the euro, which helps to reduce the need for persistent FX interventions over time.

3. Avoid cutting rates so low that banks start passing negative rates onto retail customers, which could result in cash hoarding or hurt consumption.

4. Resist venturing too adventurously into unprecedented monetary policy, especially after the difficulty experienced in unwinding policies like the EURCHF floor, as well as the risk of supporting asset bubbles.

5. Continue to deter speculative behavior against the franc, such as through being active in FX intervention and surprising the market unexpectedly.

6. Place high priority on controlling the pace of balance of sheet expansion, thus avoiding scenarios like December 2014 when the market (and not the SNB) dictated the terms of SNB FX intervention.

7. Dodge the label of a currency manipulator from the USA while trying to keep the CHF competitive. Such a label might be counterproductive given the USA is the main destination for Swiss pharmaceutical exports – a sector that now accounts for 40% of all Swiss exports and has been the largest driver Switzerland’s export-driven recovery since 2015.

8. Avoid policies that directly discriminate against particular stakeholders, such as special penalties for foreign banks or exceptions to local pension funds.

But as CS also say, not many of those aims look compatible with a risk-off Le Pen victory. A final chunk highlighting that the SNB might have to start to prioritise:

Recent pressure in EURCHF indicates the market also seems confused by the SNB’s complicated message as it currently stands – not knowing for instance whether objective 7 is as high in the SNB’s set of priorities as objective 5. Consequently, under a scenario of a Le Pen victory, we believe the SNB’s challenge is not just about how much it cuts or intervenes, but also about sending a clear signal to the market that it has narrowed down its wish list. Failure to send a signal that dismisses points 3, 4, 6, 7 and 8 could still leave EURCHF vulnerable to the downside even if it intervenes in a very aggressive manner in the days after May 7th. On the contrary, we feel the SNB may even be able to avoid the need to do as much if it can deliver a message concentrated around points 2 and 5.

More in the usual place.

Related links:
Anatomy of a currency floor removal – FT Alphaville
Switzerland’s own Trump risk (updated) – FT Alphaville
Why Switzerland is the new China – FT Alphaville

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David Keohane
(Spending some time as FTAV’s Bombay wallah. Noticeably sweatier but not much else has changed.) David studied economics, politics and journalism before joining the FT in 2011 as a Marjorie Deane fellow. He covered emerging markets, equities and currencies before making the jump over to FT Alphaville in May 2012. In between his degree and masters he wandered into the real world of business where he learnt how to manipulate a spreadsheet and organise meetings where nothing gets decided.

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