Franc traders challenge SNB as crisis meets negative yields

Written by Bloomberg | Paris | Updated: Apr 17 2012, 08:31am hrs
For the first time in seven months, traders are testing the Swiss National Banks determination to limit the francs strength against the euro as Europes resurgent debt crisis drives up demand for safer assets.

The franc breached the central banks cap of 1.20 to the euro on April 5 and April 9, and options show investors are predicting even more appreciation. It jumped 1.1% versus nine peers in a basket of currencies in March, the biggest gain since July, and is up 1.8% from a nine-month low on Jan. 11, according to data compiled by Bloomberg.

Demand for Swiss assets is so strong that investors accepted negative yields at an auction of six-month government bills last week as Spains borrowing costs rose toward levels that prompted bailouts for Greece, Ireland and Portugal. The franc is climbing against its peers even after the Swiss central bank repeated a commitment to prevent increases that threaten to bring about deflation and hurt exports.

As long as there is risk aversion tied to rising euro- region stress, investors will want to buy francs, Peter Frank, a London-based currency strategist at Banco Bilbao Vizcaya Argentaria, Spains second-largest lender, said in an interview on April 10. The Swiss franc is an extremely liquid currency, it is tradable throughout all time zones and the economy is very resilient. The franc will weaken to at least 1.23 per euro over the next three months as the central bank steps up efforts to counteract its strength, he said.

The franc has strengthened against all but two of its 16 most-traded peers in the past three months, according to data compiled by Bloomberg. While gains versus the euro have been limited to 0.5%, it surged 7.7% against the yen and 3.2 percent versus the dollar.

Switzerlands currency was little changed at 1.2030 a euro at 9:40 am London time, leaving it 1.1% higher this year. It was at 92.42 centimes per dollar, leaving its advance since the end of December at 1.5%.

Strategists expect policy makers will keep their pledge. Switzerlands currency will end the year at 1.23 per euro, according to a Bloomberg median survey of analysts. Still, theyre paring estimates for depreciation compared with the December 31 forecast for 1.26 a euro. The franc will fall to 97 centimes per dollar, a separate survey shows, stronger than a prediction of 98 centimes at the end of last year.

The very overvalued franc may depreciate to 1.35 a euro within a year, as data from Switzerland weakens and as exports suffer, James Kwok, London-based head of currency management at Amundi, the combined investment arm of Credit Agricole SA and Societe Generale, which has about $860 billion under management, said in an e-mail on April 12.

A survey of hedge funds and companies by Societe Generale indicated that confidence in the central banks ability to hold the cap past June is fading.