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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Haim R. Branisteanu who wrote (64039)	6/22/2010 4:43:53 AM
From: TobagoJack	Read Replies (1) \| Respond to of 217769

just in in-tray, from citi Switzerland - SNB Dilemma Intensifies § We argued a couple of weeks ago that the SNB would have to tolerate further FX appreciation or move relatively early to drain liquidity and hike rates. Further developments increase that likelihood. There is no legal limit on the SNB’s ability to pile up FX reserves, but in our view, this policy is unsustainable on both internal and external grounds. § Continued FX intervention to cap the CHF appears at odds with the SNB’s inflation target. With a relatively shallow recession and rapid rebound (exports up 14% YoY in May), the SNB believes that stable policy rates (and recent FX rates) will, if sustained, send inflation well above target 2-3 years ahead. The end point of the SNB’s inflation forecast (3.1% YoY) is the second highest of the last 10 years (exceeded only by that published in Q2-04, at 3.2%, and it hiked when it published that forecast). This looks a clear signal that monetary conditions need to be tightened fairly soon, either by CHF appreciation, reserve drain or higher rates. FX appreciation would cap inflation pressures over time. By contrast, at present, very large FX intervention is spilling over into excess domestic liquidity (monetary base up 38% MoM in May, a record MoM gain) and ultra-low domestic rates (3-month libor at just 11bp versus 25bp target). This makes it even harder for the SNB to achieve its inflation aims. § Continued significant FX appreciation also seems at odds with G-20 calls for more FX flexibility, evident in US President Obama’s statement that ”market-determined exchange rates are essential to global economic vitality”. These statements are mostly aimed at China, but (maybe inadvertently) also apply to Switzerland: Switzerland has higher FX reserves relative to GDP (55%, versus 46% in China), a higher current account surplus (8.3% of GDP in 2009 versus 6.0% for China), and is more export-dependent (exports are 50% of GDP for Switzerland, 27% for China). The IMF recently judged that CHF appreciation reflects relatively healthy fundamentals: “The real appreciation reflects continuing trade surpluses, improving growth prospects and safe haven effects”. Many factors determine China’s FX policy, but Switzerland’s ongoing substantial FX intervention may limit the scope for international pressure to succeed in encouraging China to show more FX flexibility.