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Battle Over Swiss Franc Ahead

By Marlene Y. Satter

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After the Swiss frank breached a ceiling set by the country’s central bank last September, the bank’s interim chairman said that it would defend the currency. Markets are wondering just how far he will go.

Bloomberg reported late Thursday that Swiss National Bank (SNB) interim chairman, Thomas Jordan, who called the franc “very, very strong” in mid-March, has said that further measures to protect the currency would be taken “if there’s a worsening of the situation.”

The Swiss franc is more popular than the euro, and it shows. On Wednesday it breached a ceiling of 1.20 against the common currency that was set by the Swiss central bank on Sept. 6, and on Thursday it climbed again after a statement by Prime Minister Mariano Rajoy of Spain that his country faced “extreme difficulty” in the wake of a bond auction that barely achieved its minimum target range.

Investors have sought out the franc previously as worries over the euro dominated markets, and this time there is another factor: Jordan only acceded to the post of chairman in January, after the previous SNB chief, Philipp Hildebrand, was compelled to step down over a currency transaction by his wife. Investors will be testing Jordan to see how far he will go to protect the set value of the franc.

“It’s a wake-up call for the SNB,” Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank in Geneva, was quoted saying. “They’ve been very successful with their verbal intervention and this is a classic street fight between central banks and markets. Their credibility is going to be questioned and they’ll have to respond in some way.”

The bank has already kept its benchmark interest rate at zero as it works to combat the threat of deflation, and the SNB board member Jean-Pierre Danthine said earlier in the week that the franc was still “overvalued.” He added that, while the franc cap helped exporters “avoid the worst,” annual rates in consumer prices would continue to decline over the course of the year.

Claude Maurer, an economist at Credit Suisse in Zurich, was quoted saying, “Risk aversion has increased, people want to avoid the euro. The SNB was probably hoping for a more relaxed Easter break. Jordan’s job won’t get any easier.”

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