The Swiss National Bank may have abandoned its currency cap, but that doesn’t mean it has stopped capping its currency.
While policy makers haven’t confirmed it, they’re defending a de facto franc limit more than 10 percent stronger than the one they scrapped 21 months ago, according to Bank of America Corp. and the wealth-management unit of UBS Group AG. The franc appreciated to this 1.08-per-euro threshold four times since mid-year, and each time snapped back.
Preventing a stronger franc, which could hurt the economy, comes at a cost to the SNB. Intervening to buy euros has helped push its foreign reserves to a record of about $630 billion, leaving the central bank vulnerable to swings in currency markets as it manages a growing pot of money. Preventing an “uncontrollable expansion” of its balance sheet was one of the reasons SNB President Thomas Jordan gave for dropping the official cap in January 2015, when its reserves stood at $498 billion.
“There’s continuous political pressure on the SNB that it’s using so much money for stabilizing the currency,” said David Kohl, the Frankfurt-based head of foreign-exchange research at Julius Baer Group Ltd., ranked by Bloomberg as the most-accurate currency forecaster. “With this intervention, they have quite a lot of euro assets, and of course if there’s an appreciation of the franc, these euro assets will lose in terms of value.”
The unofficial cap has helped the franc become one of the least-volatile major currencies versus the euro during the past six months. Only the pegged Danish krone has experienced smaller price swings. SNB spokesman Walter Meier declined to comment on the existence on a de facto exchange-rate cap.
“There’s no suggestion from the SNB themselves that they’ve set a floor,” said Kamal Sharma, director of Group-of-10 currency strategy at Bank of America in London. “But we look at the price action, we look at the charts, and we say that 1.08 has been a level which the Swiss franc hasn’t been able to strengthen beyond.”