Swiss Authorities Set Ceiling on Franc

September 6, 2011

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

Swiss monetary authorities released the above statement establishing a franc floor of 1.20 per euro and pledged whatever intervention might be needed to enforce such.  The ECB has no intention to intervene said it will be up to the Swiss to enforce the peg.  The franc plunged 8.2% against the dollar following the Swiss action.

Besides the 8.9% jump against the franc, the dollar also has gained 0.6% versus the yen and kiwi, 0.5% against sterling, 0.3% relative to the euro, and 0.2% versus the Canadian and Australian dollars.  The yuan is steady.

The DOW, Nasdaq and S&P, which were closed Monday, are down 1.9%, 1.8% and 2.1% so far today.  In Europe, Swiss share prices advanced 4.1%, but stocks have lost a further 0.9% in Germany and 0.8% in France.  The Ftse is up 0.5%.  In the Pacific Rim, equities declined 2.2% in Japan, 2.4% in Taiwan, 1.1% in South Korea, 1.6% in Australia, and 0.8% in China.

Gold exceeded $1900 per ounce for the first time on Monday and remain 1.1% above Friday’s close at $1898.30. Oil is 1.7% lower than on Friday at $85.00 per barrel.

German bund yields fell 11 basis points.  !0-year Treasuries are four basis points lower.  10-year JGBs dropped 3 bps.

The U.S. service sector purchasing managers index printed in August at 53.3, 0.6 points higher than in July and 2.3 points better than expected.  Such compares favorably to readings reported yesterday of 51.5 in Euroland and 51.1 in Britain.  New orders in the U.S. index improved by 1.1 points to 52.8.

Euroland GDP growth last quarter was confirmed at 0.2% from the first quarter and 1.6% on year.  Consumption and government spending each contracted 0.2%.  Business investment went up 0.2% after a 1.8% increase in the first quarter.  Net exports enhanced growth by jus 0.2 percentage points, and inventories boosted the growth rate by just 0.1 of a percentage point. 

Within the euro area, 2Q over 1Q GDP growth amounted to 0.1% in Germany and The Netherlands, 0.0% in France and Portugal, 0.3% in Italy, 0.2% in Spain, and 0.7% in Belgium.

German industrial orders slumped 2.8% in July and were 1.1% lower than their 2Q average level.  Foreign orders for capital goods plunged 12.8%.  The 12-month rate of increase in total orders was 8.7%, down from 9.4% in June. 

The Reserve Bank of Australia as expected left its 4.75% Official Cash Rate unchanged.  There had earlier been 7 25-bp increases but none since November 2010.  A statement from officials express continuing concern about the medium term inflation outlook but spoke of a very unsettled global financial environment and reduced global and domestic growth prospects as a result.

The Bank of Japan Policy Board began a two-day monthly meeting.

Same-store retail sales in Britain were 0.6% lower in August according to the British Retail Consortium than a year earlier in August.  Total sales were up 1.5% on year.  British auto registrations were 7.3% higher in August than a year before.

Australia’s current account deficit narrowed to AUD 7.4 billion in 2Q11 from AUD 11.1 billion in 1Q11 but was  65% bigger than the deficit a year earlier.  Australian home loans rose 1.4% in July, while loans to businesses went up 1.5%.

Germany’s constitutional court is scheduled to rule tomorrow on the acceptability of the Greek bailout.

Swiss consumer prices slid 0.3% in August and to a 12-month increase of 0.2%. 

Czech industrial output posted a smaller 4.4% on-year increase in July after rising 7.4% in June. Romanian GDP went up 0.2% in 2Q and by 1.4% on year. 

Brazilian GDP grew 0.8% in 2Q and 3.1% on year, down from a 4.2% increase in the year to 1Q.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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2 Responses to “Swiss Authorities Set Ceiling on Franc”

  1. Jimbo says:

    So, what happens now that Switzerland kicks the Euro when it is down? What is the most likely outcome of the Euro based on everything seemingly spiralling downward?

  2. larrygreenberg says:

    First, we have to see if this unlimited pledge to sell francs against euros is successful. Heavy intervention by the Swiss National Bank a few years ago resulted in large losses and ultimately failed. That said, this move takes the global economy one step closer to recession. The move will simply divert market strains somewhere else. One of the causes of the stock market crash of October 1987 was widespread intervention that year to support the dollar. That effort drove bond yields higher initially, then encouraged the global stock market crash, and finally saw the dollar drop sharply over the remainder of the year as central banks withdrew their support for the U.S. currency.