Does The Swiss National Bank's Euro Floor Have Holes?

I’m not entirely sure how to feel about the SNB. Most retail broker screens seem to have a bottomed around 1.1995, EBS shows 1.1990, Bloomberg says 1.1999 but there is no consensus. Let’s take a look at how the major financial press has characterised today’s move before I share my thoughts.

From the FT:

Traders suggested the breach was a largely technical issue, however. An analyst said: “It was probably some regional bank with no credit limits, and the lack of liquidity took it below SFr1.20.”

The WSJ noted thin pre-Easter markets as a factor (doubtful) and says the SNB came in after the breach:

Traders said the Swiss National Bank bought euros in the market shortly after its floor was breached, helping the common currency to move back up to 1.2016 francs recently…  “It will be difficult for momentum to build for investors to start positioning against the floor,” said Michael Sneyd, a currency strategist at BNP Paribas.

Reuters cites some research from RBC that suggests upcoming EUR/USD and EUR/JPY buying:

The euro hit a low of 1.1992 francs, according to Reuters data, before recovering… Earlier in the day, RBC Capital Markets said the Swiss National Bank had bought about 1 billion euros against the franc. Given the SNB’s reserves are 50 per cent in euros, 25 per cent in dollars, 9 per cent in yen, 5 per cent in sterling, 4 per cent in the Canadian dollar and 4 per cent in other currencies, the bank said half that 1 billion euros can stay in euros but the rest will have to be recycled into the other reserve currencies in the same proportions.

Bloomberg says a “street fight looms” between the SNB and markets. They note comments from late March from the SNB’s Danthine :

The SNB applies a “zero-tolerance principle” on its cap, Danthine said as recently as March 22. It “ensures day and night that the minimum exchange rate is maintained — from Sunday night when the markets open in Sydney until Friday night when markets close in New York.”

Here’s a take from Credit Suisse, quoted by Bloomberg:

“We think that the move was driven by renewed Europe- centric bouts of risk aversion and an attack on the floor drivenby significant orders by speculators,” said Bernd Berg, a currency strategist at Credit Suisse in Zurich. “As the move drove euro-franc below 1.20 the SNB reconfirmed its credibility by coming into the market and also verbally reconfirming its commitment to the floor. We therefore think the floor will hold.”

SocGen did a poll with 6600 people (mostly yesterday but some after the breach today) and 75% said the floor will hold. They said confidence was especially high in Switzerland.

After reading through everything I can get my hands on, it seems to me that most commentators have missed the point. The market was largely doing the SNB’s work because the Swiss central bank had credibility. There is no doubt, to me, that this credibility has been damaged, at least for retail traders. The only question is, how much damage has been done? How much less likely are you to buy EUR/CHF? How much more likely to short the pair?

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