Voters yesterday rejected a proposal to require the Swiss National Bank to keep at least 20% of its assets in gold, up from 8% 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’ve 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 is still about 0.2% from the cap.
“Prospects for further European easing give markets reasons to continue to test the peg in the absence of the Swiss referendum,” said Sam Tuck, a senior foreign-exchange strategist at ANZ Bank New Zealand Ltd. in Auckland. As for the rejection of the gold proposal, “markets are taking it in their stride as expectations were for the vote to fail,” he said.
The Swiss currency was little changed at 1.20271 per euro as of 4:01 p.m. London time.
Traders are protecting against further gains in the franc, even after the referendum. 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 premium was at 1.12 percentage points today.
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% 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 last 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% of the time in the past five years, according to Deutsche Bank AG.
The referendum, proposed by members of the Swiss People’s Party SVP, was rejected by 77.3% of voters, the Swiss government said on its website yesterday. Polls had forecast the initiative’s rejection.
“The natural pressure for euro-Swiss, regardless of the gold vote, is to go toward the floor,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London, referring to the currency pair. “There’s greater faith in the franc than the euro, largely due to potential QE. But the other side of that is the SNB’s willingness to defend the floor.”
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% at the end of last week, from 53% on June 30, options data compiled by Bloomberg show. The probability was at 83% today.
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 yesterday 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 already intervened 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.
Their resolve may be tested by the ECB’s actions. The euro area’s 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 9.3% against the dollar this year.
“The euro’s weakness is the SNB’s headache, and even though the Swiss gold referendum proposal was rejected by a big majority, EUR/CHF is hardly bouncing,” Kit Juckes, a strategist at Societe Generale SA in London, said by e-mail today. “Further easing from the SNB is needed and likely.”