Swiss Franc Minimal Exchange Rate Not Tested by Market
In September, the Swiss National Bank announced a fixed minimal Swiss Franc to Euro parity. So far, it had to spend but little funds to defend it. The credibility of the Swiss National Bank has been sufficient to cement the limit in the market. At the same time, the bank announced year to date profits of over five billion.
According to figures published by the Swiss National Bank (SNB) at the end of the third quarter, its total foreign currency positions in late September were 305.3 billion francs. This is 25 billion more than it showed in its books in late August prior to the introduction of the minimal exchange rate between Euro and Swiss Franc.
The smallest part of the increase is due to foreign exchange purchases. The higher balance sheet valuation is explained by revaluation of foreign currencies held by the SNB. Higher exchange rates of currencies having gained in value over the Swiss Franc since August make up the lion’s share of the increase.
Traders have not dared to test the minimum Euro to Swiss Franc parity announced by the SNB to be defended at all cost. This goes to show that the reputation of the National Bank was sufficient to convince the markets. They believed that the announcement was more than mere rhetoric. The reticence of traders is founded in history. In 1974, the Swiss National Bank fixed a similar minimal parity to the Dollar. It bought hundreds of billions of Dollars defending that parity. Flooding the Swiss Franc money market at the same time paid off, too, for the SNB gamble to succeed this time round.
Beginning of September, the SNB had set the minimal exchange rate for one Euro at 1.20 Swiss Francs. The trigger was the continuous erosion of the common European currency which caused serious harm to the Swiss economy. The SNB announced then and reaffirmed now that it will keep to this course at any price and that it will buy Euros ad nauseam if necessary. In September, experts had feared that the SNB could be saddled with billions of Euros because traders would test the seriousness of the announcement.
Besides its successful intervention, the Swiss National Bank has announced a 5.8 billion Swiss Franc (6.7 billion Dollars; 5.2 billion Pounds Sterling) profit for the first nine months of 2011. The high profit is explained by valuation gains on gold on one hand and gains made due to the current interest rates offered by the market on the other. The strong Swiss Franc on the other hand caused exchange rate revaluation losses, too.
The gold price accounted for a five billion gain in book values. Foreign exchange positions contributed 0.3 billion to the result; this figure hides the fact that weak currencies marked a loss of 4.7 billion while gains on strong ones were 5 billion.
Results depend on the SNB’s gold, foreign exchange and capital market holdings. These balance sheet positions show a high volatility. Predictions about annual earnings should be made with care; reserve building by the SNB is legendary and profits for a full year tend to resemble each other with minor variations. Shareholders in the Swiss National Bank should be warned not to expect a dividend again.
Sources and further reading:
Swiss National Bank – Homepage
Die Schweizer Nationalbank liegt richtig; in German
Die Bilanz der Schweizer Nationalbank bläht sich weiter auf; in German
Swiss National Bank Fixes a Minimal Euro to Swiss Franc Parity
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Published in: Personal Finance
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