What does the Swiss National Bank know about ECB QE that the market doesn’t?

Over on his Forbes Blog, Open Europe's Raoul Ruparel delves into yesterday's surprise announcement that the Swiss National Bank (SNB) was removing its exchange rate floor of 1.20 on the EURCHF. So what does the SNB know that no one else does?

A Market “Tsunami”

The Swiss National Bank’s (SNB) decision to yesterday  remove its exchange rate floor with the euro led to a sharp move in the foreign exchange markets as the Swiss Franc (CHF) appreciated by 39%. On his Forbes blog, Raoul examines the motivation behind the SNB’s unexpected move.+

What motivated the move?

Raoul argues that he’s yet to hear, “a particularly good or convincing answer to this,” and that the SNB’s own explanation was “incredibly lacking and clearly was hiding other reasons,” but that it has everything to do with the ECB’s Quantitative Easing (QE). He suggests a number of factors which could have motivated the SNB’s move:+

• SNB FX reserves

Swiss National Bank Foreign Exchange reserves

Over the past few years the SNB's foreign exchange reserves have grown hugely - now approaching 80% of GDP. This is down to its attempts to keep the currency weaker against the euro. If it had continued such attempts in the face of ECB QE its reserves could have swollen by many more hundreds of billionsSource: SNB, Open Europe.

• The QE to be unleashed by the ECB next week will see a huge influx of liquidity into the Swiss system – leading to the SNB purchasing billions more in euros, expanding the huge balance sheet it already holds (worth 74% of Swiss GDP.) “While this may been technically possible,” argues Raoul, “the SNB balked at the proposition.”+
• If the SNB had not dropped its exchange-rate floor with the euro, it would have become even more intertwined with ECB policy – which is not heading in a direction it likes.+
• The SNB was concerned about how it would exit its EURCHF floor – and the longer it waited – the larger its potential losses grew. Nonetheless, in theory, this is a loss that the SNB could manage.+
• This implies, therefore, that the SNB made a judgement call, “that such potential losses would be a huge dent to its credibility and possibly politically untenable. We have already seen a close run referendum in Switzerland which would potentially have forced the SNB to hold huge amounts of gold and de facto move back towards a gold standard.” The fear of this happening again could have made it change course.+
• With ECB QE on the horizon, the SNB may have also just have seized its opportunity to roll back its huge foreign exchange reserves – of which a great many are in the form of government bonds – i.e. exactly the assets that the ECB will be snapping up.+

Does the SNB know something about ECB Quantitative Easing that no-one else does?

Raoul argues that, fundamentally, there is no real technical reason for the SNB to be afraid of QE, especially not at the €500bn level suggested by most recent reports. Raoul concludes then that,  “This leads to the suggestion that it is aware of something the broader market, and all of us, are not. Mainly, that the ECB QE will be of a much larger level, much more decisive and be imminently available.” If this does not turn out to be true, then the SNB will have some tough questions to answer.