It was originally conceived as a temporary emergency measure during the financial crisis’ aftermath. But the Swiss National Bank has decided to maintain its cap on the value of the Swiss franc against the euro.
Because of the currency market’s recent volatility, the limit of 1.20 Swiss francs per euro is now coming back into sharp focus.
Over the past month, the euro has been slipping ever closer to the Swiss central bank’s intervention limit. The last time SNB purchased euros to weaken its own currency was in September 2012.
The bank would not reveal whether or not it intervened again recently.
"Up to now, we can see no evidence of SNB intervention on the currency market,” said Marcus Hettinger, a currency strategist at Credit Suisse.
Security-conscious investors could well prefer the franc as an investment currency, as it is considered more stable.
Janwillem Acket, chief economist at the Swiss bank Julius Bär, gave two main reasons for the upward trend of the franc.
"There is the announcement of the European Central Bank that it will expand its balance sheet by €1 trillion, a move that will push down the euro,” he said.
"The second factor is the uncertainty in advance of a vote on the gold initiative,” the economist said, referring to the upcoming Swiss referendum that would require the SNB to keep 20 percent of its reserves in gold.
Because of the flood of money prescribed by ECB President Mario Draghi, interest rates in the euro zone are now the same as in Switzerland: zero. That makes investing in the low-growth euro zone less attractive than in the Swiss-franc area. Security-conscious investors could well prefer the franc as an investment currency, as it is considered more stable.
Passage of the referendum to save Switzerland’s gold reserves would mean the SNB must increase its reserves in gold from the current 8 percent to 20 percent within five years.
Furthermore – and more dangerous from the ECB’s perspective – the SNB would no longer be permitted to sell gold. Swiss supporters of the initiative hope it would make the franc even more secure. The SNB is opposed to the plan.
Swiss voters will decide the issue November 30.
The referendum to save Switzerland’s gold reserves would mean the SNB must increase its reserves in gold from the current 8 percent to 20 percent.
“The gold initiative is causing uncertainty," Mr. Hettinger said. "If accepted, it would be more difficult to defend the exchange rate limit, but not impossible."
The reason is that the SNB can continue to print an unlimited number of francs to buy euros to weaken its own currency. But in a second step, the bank would have to exchange 20 percent of the new currency reserves into gold.
Sören Hettler of the DZ Bank in Frankfurt expects a few uncomfortable weeks for the bank in the case of a “yes” vote. The initiative, he warned in a study, could lead to doubts in the central bank’s ability to function. "Speculation about the exchange rate’s lower limit would increase in this case,” he wrote in the report.
In an Internet survey, only 38 percent supported the gold initiative and 47 percent were against it.
Financial experts remain skeptical. "The initiators are addressing a vague feeling of Switzerland being at the mercy of the euro zone," said Mr. Acket of Julius Bär. "Especially older voters could be receptive to this.”
According to online polls, 38 percent supported the gold initiative and 47 percent were against it.
Approval of the plan could be unsettling, at least in the short term, according to Robin Winkler of Deutsche Bank. He warned that if the initiative passed, it could force the SNB to introduce negative interest rates to defend the exchange rate limit, in addition to purchasing euros.
All experts agree the plan would seriously restrict the Swiss central bank, especially because of the ban on selling gold. While the bank can further expand its balance sheet, it can only make limited reductions in it – because the gold reserves would have to remain in the balance sheet permanently.
For that reason, SNB’s board chairman, Thomas Jordan, is engaged in a regular series of interviews warning about the proposal’s consequences.
“A ‘yes’ vote would make it more difficult to pursue an optimal monetary policy," he told the Swiss Sunday newspaper, Sonntagszeitung. "Recessions would be more probable than they are today.”
Holger Alich is based in Switzerland and covers the finance industry from there. Before that, he lived and reported from France. To contact the author: [email protected]