SNB expands liquidity to fight strong franc

ZURICH: The Swiss National Bank said on Wednesday it would further expand liquidity measures to counter a runaway Swiss franc, raising lenders' sight deposits to 200 billion Swiss francs from 120 billion.

As you can see by the reaction in the Chf crosses, the market is very disappointed with the lack of SNB direct intervention. It really is a classic case of buy the rumour sell the fact, but this time the fact was not even as impressive as the press reports.

It's a bit of a disappointment. There had been expectations that the SNB would set a limit on the exchange rate and now it's just expanding liquidity. and that's now being shown in the exchange rate.

The SNB is not powerless. But it needs to use the right instruments. If it wants to do something it should use strong steps, such as the lower limit.

This is a disappointment as the market was expecting far more radical measures from the SNB like targeting a specific exchange rate. This is more of the same, and is inadequate in an environment where investors are seeking safe havens. This will invite more speculative flows into the Swiss franc.

What they've done is really just an extension of what they've been doing previously. I'm not sure it will be any more effective.

Part of the impact on the Swiss franc from what they've done so far has been the expectation that they are going to do more. Although they have announced an expansion of liquidity, the failure to go beyond the existing framework of liquidity extension may well lead to Swiss franc strength again.

In the past week there has been the expectation and hope that they may do something in addition to liquidity extension i.e. a peg. So we may get disappointment and a stronger franc.

The expectation in the market was that they would intervene, but they didn't and now the franc is rising again and I expect it will also be stronger at the end of the day.

It would be difficult to do an intervention on the spot market because no-one is convinced that they can defend a certain target, whatever it may be. They are hesitating to intervene so they are trying with the swaps and the expanding of the sight deposits.

It is possible that at some point they will have to intervene because the trust isn't there that the sight deposits will work. Maybe in a week or in two weeks, they might intervene.

The SNB seems very determined to do what it can to reduce pressure on its currency and it still has more extreme cards in its hand that it could play depending on market conditions.

So while there may not be a euro peg today that doesn't mean there won't be one tomorrow. In fact central banks in the past have preferred to announce pegs at the weekend when markets aren't trading so that banks and institutions have time to prepare their systems.

So intervention risk may remain high for some time yet.

Copyright Reuters, 2011