SNB Foreign Reserve Swells as Franc Cap

Submitted by Tradervox 1 on Wed, 08/08/2012 - 14:42
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Tradervox.com (Dublin) – The Swiss National Bank’s foreign currency reserves swelled in July by 11.3 percent to reach a record high of 406.5 billion Swiss Francs according to a statement in the Swiss National Bank website. This pushed the foreign currency reserve to 71 percent of the country’s GDP. The increase was largely due to currency purchases made to defend the minimum exchange rate set by the central bank to shield against the weakening euro. Thomas Jordan, the SNB President has indicated in the past that the central bank will do everything possible including buying unlimited amount of foreign currencies to enforce the 1.20 Franc per euro ceiling.

According to Maxime Botteron, who is an Economist in Zurich at Credit Suisse Group, the pace of intervention taken by the SNB can be maintained for a long time as the bank is increasing liquidity in the market by purchasing foreign currency. The only impediment to this would be in situation where the euro collapses. However, such efforts might be limited by inflation but this is not a problem facing the SNB for now.

The franc had strengthened against the euro as investors sought safe haven, forcing the SNB to introduce the cap in September 2011. Since then, the foreign reserve has increased by 44 percent. After the SNB press statement, the Franc weakened against the euro, trading at 1.2015 at mid day trading in Zurich yesterday. The currency has been trading between 1.20 and 1.24 since the cap was introduced with a single instance of breach. With these purchases, the Swiss National Bank increases the liquidity available to financial institutions and consumers hence increasing the risk of price hike in the market. The SNB website also indicated that consumer prices in the country fell in July, making it the tenth straight monthly decline.

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