Just wondering…why do you suppose the SNB can’t/won’t do something similar to the BOJ of Fed as far as QE/purchasing bonds/or other major currency weakening tools? I mean, setting the 1.20 floor was nice for them to prevent downside volatility, but let’s face it, the SNB would be much happier to see EUR/CHF at 1.30 and above. So why would they not do something else more aggressive besides the floor like QE or whatever?
The SNB has signaled that they could take further measures. As far as why they don’t QE, there are two ways of looking at it.
The first way is from what statements they have made perspective. In analyzing the previous statements and phrases of the SNB officials, you can tell that they seem to be comfortable just keeping the 1.20 floor in place. They don’t want to do anything drastic like raise the floor or any massive QE. They are in a comfortable spot. They acknowledge that the 1.20 floor is very important, and that they expect the CHF to weaken. I believe one of the SNB officials believed the EUR/CHF should be somewhere between 1.28 – 1.44. But they prefer the general market forces to take over and for it to naturally rise for now. They are still leaving in place slight threats that they could take further measures. But I believe that is more to reduce the cost to them of maintaining the 1.20 floor. If they maintain that language, then the market will be reluctant to try to sell EUR/CHF near the 1.20 floor. And if the price of EUR/CHF can stay above 1.20, and into the 1.2050’s and 1.21’s, etc, then that means the SNB will not need to intervene to buy any more EUR/CHF. They can keep their big bids at 1.20, but it will not cost them anything to maintain the floor if the market price is not near it. So they will try to do slight verbal intervention, to reduce the cost and size of the actual intervention. Central bankers always prefer verbal to actual intervention, if the verbal intervention can do the job or part of it. It’s like free for them. Sort of like when Draghi announced the OMT in July/August 2012. He announced the verbal intervention and subsequently presented the plan, but OMT was never activated, yet the yields for Spain and Italy dropped a lot. They didn’t need to do any physical intervention by activating the OMT. The verbal intervention was sufficient to do a massive job of improving financial conditions in the Eurozone.
The SNB may want to keep some tools in reserve. Unless the 1.20 floor is under severe pressure, they don’t have to introduce any new measures. They can still keep their gun loaded so to speak. If the 1.20 floor goes under pressure, then they may feel the need to use up their bullets. But they don’t seem eager to waste their bullets trying to push EUR/CHF higher in the current macro environment.
The next way to analyze it is from an economic and macroeconomic perspective. Switzerland and Japan are in a bit different situations. You have a new government coming in that has pledged to reverse the 15-25 year deflation and stagnation that Japan has been in. I don’t believe Switzerland has been in stagnation and deflation for as long as Japan has been in. The Swiss problem with the high CHF only started over the past few years. They imposed the 1.20 floor because the high CHF was causing too many problems in the CHF economy. Now that it is 2,000 pips higher, they believe it has added some level of stability. To try to take even more massive action to push EUR/CHF another 1,000 or 2,000 pips higher, well they would want a good reason to do that. A reason rooted in either a really struggling economy or even more deflation. The SNB did adjust downward their inflation forecast in their last March 2013 meeting, but it doesn’t seem to be enough to interest them to take any more drastic action.
They could buy Swiss government bonds, but they may not want to fuel a market bubble in them, unless they have a really good reason such as 1.20 floor under pressure, very bad economic situation, big deflation, etc. And the SNB does not want to buy any Mortgage related securities because they already feel that housing is in a bubble and they want to reign it in. Buying more MBS would fuel the housing and mortgage bubble and they don’t want to do that.
Also, the SNB doing the 1.20 floor and buying up hundreds of billions of Euro’s is very similar to doing QE. They still expanded their balance sheet. They just didn’t go wild and purchase hundreds of billions of bonds or MBS because the Swiss economy is very small, so buying hundreds of billions of EUR/CHF was a lot easier for them.
The SNB has a balance sheet of over $400 billion, while the Swiss GDP is only around $640 billion. So their balance sheet represents a whopping 60%+ of their economy. To do more could be risky. The Federal Reserve on the other hand has a balance sheet of say $4 trillion, while the US GDP is $15 trillion. So the FED balance sheet makes up only around 26% of the economy. There is a big difference.
I would say it is extremely rare where a central bank institutes a peg/floor. It is even rarer still that they do a peg/floor AND massive QE on top of it. It just doesn’t happen that often.
As you can see with the BoJ, they didn’t do peg/floor AND QE. They just did QE, which the expectations drummed up for it as well as the change in inflation goal to 2%, etc was enough to cause a 2,000 pip move in the JPY pairs.