- SNB caps the Swiss franc
- CSL exposed to USD/CHF
- AUD might find further support


By Greg Peel

Back in 1978 the German economy was in a sorry state and funds were flowing steadily out of the German mark and into the safety of the Swiss franc. It was also a time anyone who was anyone, by whatever means, held a secret Swiss bank account, further increasing the popularity of the neutral country's currency. The subsequent strength in the Swissy forced Switzerland's central bank, the Swiss National Bank, to intervene to cap the currency and prevent the erosion of Switzerland's export industry, including tourism. Famously, the intervention was a disaster.

In short, the SNB, like King Canute, could not hold back the tide. The Swissy continued to rally eventually, the SNB lost a fortune, and when the currency did eventually subside inflation set in.

It is a lot easier to cap one's currency than defend it, given all one needs to do is print more of the stuff. But such intervention does not represent a currency peg per se, given the central bank's resolve can still be tested to breaking point by currency markets. And a debasement of a currency, via printing, must by definition lead to monetary inflation down the track as soon as the currency loses its appeal. One could buy gold as an alternative to printing money, but then it was only a couple of years ago the SNB was selling some of its substantial gold holdings. The rally in the gold price meant the bank's reserves were overweight in gold.

Commentators have been drawing comparisons to 1978 for two years now, since once again the SNB began intervening in currency markets to keep a lid on the Swissy's rampant rise. The Swissy has become the paper currency safe haven of choice ever since European debt issues rendered the euro as no longer a safe diversification alternative to the US dollar, which was itself being debased by quantitative easing policy. In 2011 the Swissy has really run riot, marking new highs against the euro and the US dollar, and the SNB has been forced to act.

To date the SNB has set no target for its intervention, but last night it did. The central bank has vowed to cap the EURCHF against the euro at 1.20, and the announcement immediately saw the Swissy plunge 9% to the target (from EUR 1.12). The European Central Bank was quick to point out that the SNB was acting alone, albeit the intervention is to the benefit of the ECB as it will provide support for the euro in further times of stress (The SNB will sell Swissy to buy euro).

Talk now is as to whether this time the intervention will actually work. The subsequent rallies in both the euro and the US dollar suggest the market is assuming such at present, but were the eurozone debt crisis to heighten significantly one again has an image of Canute wandering into the icy North Sea waters.

If it does work, it should be good news for Australian blood product company CSL ((CSL)). CSL is a global leader in its field and like every other Australian manufacturer has lately been fighting the strong Australian dollar. CSL's FY11 earnings were up 14% in constant currency terms but exchange losses meant its reported profit was down 11%. Yet unlike most Australian manufacturers, CSL also suffered from the rise in the Swiss franc against the US dollar, which has been 20% since March.

This is because most of CSL's immunoglobin products are produced in Switzerland. If you're wondering why that's the case, note that Red Cross blood donation centres are now run by CSL.

Clearly a capped Swiss franc will prevent a further rise in the Swissy against the US dollar, and indeed it will take pressure off the US dollar index. This should mean less upward pressure on the Aussie as well, but then the exchange relationships are not quite so mathematically simple. Suffice to say SNB intervention is good news for CSL rather than bad, assuming the Swissy does not burst through the SNB's defences.

The other issue is that Swiss franc is simply another in the growing list of "floating" currencies now subject to central bank intervention one way or another. The US dollar is subject to quantitative easing and may be about to see more QE, the pound has been subject to QE ever since the GFC, the yen has also been subject to QE and the Bank of Japan has been forced to intervene directly, just as the SNB has, to cap the yen, particularly after the earthquake sparked rapid currency repatriation. The euro has been subject to its own variety of QE since the GFC, and more so lately, via ECB purchases of sovereign bonds. Brazil has been keeping a bit of a lid on the real lest its iron ore becomes too expensive for China. China, of course, pegs the renminbi in a range against the US dollar.

The bottom line is that while every politician and central banker in the world will espouse the economic virtues of a strong currency, that claim should carry the caveat "but not too strong". What we currently have now is thus a "race to the bottom" between developed and developing nations to not have the currency that's too strong against the rest. Given exchange rates are a zero sum relationship, Newton's third law comes into play. No one can ever "win".

ANZ Bank suggests that now the Swissy can no longer be used as a safe haven (and we note the yen is similarly invalid, the euro a basket case and the greenback about to be debased once again one assumes), the safe haven currencies of choice will be the Asian currencies (ex-Japan) and the commodity currencies (ex-Brazil). The South African rand is a bit dodgy so that would seem to imply the Canadian dollar and the...oh no.

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