Is Swiss Franc Devaluation Working?

According to reports, the Swiss National Bank (SNB) has confirmed it has spent $32 billion to weaken the Swiss franc since March. How effective has that been ? The trade-weighted index (BOE calculation CEERSZ on Bloomberg) has effectively depreciated by about 3.2% from its peak on March 6 to today. Against the euro, the Swiss franc has fallen about 4.3%. Given the openness of the Swiss economy (exports+imports as % of GDP) this currency move is not tantamount to much easing of monetary conditions.

Recall the Swiss intervention is part of their unique quantitative easing. Whereas the U.S., Japan and the U.K. bought their own bonds, the SNB says its bond market is too small so it has to buy foreign bonds and to do so, of course, requires, buying foreign currencies.

SNB's Jordan said earlier today that the intervention has been effective. But he did not provide a metric. And it is difficult to measure the counter-factual--where would the franc be if it were not for the intervention.

We have recommended not fighting the SNB during most of the period since March and most recently recommended buying euros for francs. Earlier Wednesday, the euro traded at its best level of the month against the Swiss franc. Yet the best level the SNB was able to achieve was on the initial shock factor of one of the world's largest current account surplus countries intervening against its own currency. The euro reached a high of CHF1.5447 on March 16 and has not traded above CHF1.54 March 19.

Update: The above estimate of SNB intervention was derived from last week's data that showed that its euro holdings rose by 32 billion euros in Q2 after a 20.26 billion euro increase in Q1. Dollar holdings rose to almost $20 billion from $13.2 billion. Of course the full increase might not reflect only intervention as there may be a valuation component as well. The real point was to take a quick look at how effective the intervention has been, not so much to have the final word on the size of the operations. The other important points include:

1. SNB thinking the intervention has been successful

2. They will continue to intervene (if needed) The direct market impact has been minimal.

Comments

[ksmithdc]

Interesting read, thanks!

2009 Jul 30 12:50 PM