Three years ago the Swiss National Bank (SNB) announced a lower limit (floor) for the EURCHF exchange rate of 1.20, vowing to protect the level to stop the appreciation of the Swiss Franc. Since that date, the Head of the SNB, Thomas Jordan has regularly verbally intervened stating the central bank “would buy in unlimited amounts.” The verbal intervention has also been at times accompanied by bank buying Euro’s to hold the floor, to stop the strengthening of the CHF.
Save Our Swiss Gold Initiative
The Save Our Swiss Gold Initiative is led by the ultra-conservative Swiss Peoples Party with the referendum taking place on the 30th November 2014. The initiative aims:
1. The SNB would be unable to sell any of its Gold
2. All of the Gold reserves would need to be held in Switzerland
3. A minimum of 20% of the central bank’s assets would need to be Gold
If the referendum is successful, this would be a significant shift in policy for the SNB. The bank would be unable to maintain the floor, as it wouldn’t be able to purchase unlimited amounts of FX reserves to hold the EURCHF floor.
Here is a link to the Arguments of the SNB against the initiative.
The exchange rate has fluctuated over the last 3 years between 1.20 and 1.24, but the rate has begun grinding lower towards to the floor. The SNB’s open policy to protect the floor, should keep the minimum exchange rate in place, as they will buy Euro’s in unlimited amounts on the interbank market, on venues such as EBS.
The SNB has considerable reserves, and has committed substantial amounts of capital into maintaining the floor. This would become untenable if the Save Our Swiss Gold initiative is voted in as a policy. The central bank would be like a bird with clipped wings, as they wouldn’t have the flexibility to undertake monetary policy.
The pair is creeping towards the floor, as speculators eagerly watch the next move from the SNB.
Currently the pair is trading 1.2024.