Being virtuous seems to entail just as many problems for Switzerland as it does anywhere else. Although it shares none of the sovereign issues of the majority of eurozone members, it does not mean the economy is without issues (beyond deflation). This was evident in the FX reserves data released recently, which showed a 28% jump when the SNB intervened during May to defend the EUR/CHF 1.20 level.
This morning’s comments from the SNB President Jordan reflect the fact that holding the line is not without cost. While the SNB was talking tough on defending the 1.20 level, stating it “will not tolerate” any further franc gains, Jordan also outlined the need for corrective measures in the property market. The issue is the extent to which the expansion of the monetary base is feeding through into asset prices - property in particular. This is not a new thing and there was tinkering around the edges last year to temper the impact on property values. Now the SNB sounds a bit more hawkish, noting that apartment prices “already exceed values already justified by fundamentals”. The irony is that, in tackling a credit crisis, in part caused by excess asset values elsewhere (US sub-prime, UK property etc.), the SNB is creating the same problem via its currency fire-fighting. For different reasons the same issue is being seen in Germany.Despite the SNB’s assurances, the market remains nervous, particularly with the Greek election ahead this weekend. The cost of 3mth EUR/CHF puts has risen over the past month, reflecting the markets’ perception of a greater probability of the CHF cap being breached in the near future. Current option pricing puts this between 15% - 20% of the 1.19 level being breached.