Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 11 June 2012 at 12:28 GMT

CHF: Systemic risk and the EU debt crisis

Chief Economist & CIO / Saxo Bank

We have been relatively sanguine on the CHF and EURCHF 1.2000 peg, but the latest developments suggest higher risk of a peg break and a stronger Swiss franc. 

Executive summary
The chances of the peg at 1.2000 breaking have increased from less than 10 percent to more than 25 percent. Assuming the downside risk is parity (1.0000), the risk of 20 CHF big figures gives a weighted risk of peg-breaking of: 5%  (20 percent move x 25% chance = 5%). We recommend closing or reducing all short CHF exposure over the summer period as the tail-risk in both Switzerland and Europe is rising.

The Swiss National Bank (SNB), can in principle intervene as long as it so desires – though the problem quickly becomes one of magnitude, as the intervention is now becoming a sizeable percentage of the Swiss economy.


 When the peg was introduced in September 2011, it made perfect sense:

1.       The macro environment was negative growth and deflation.

2.       The CHF was being impacted more by flight-to-quality than buying Switzerland per se

3.       There was a surprise element in the move that shocked the market out of some of its long CHF positioning

4.       It was considered, at the time, to be enough merely to guide interest rates to zero and then intervene.

Fast forward to today and things have changed:

1.       The macro environment has given up big upside surprises to Swiss GDP growth (Q4-2011 came in at +0.5% quarter-on-quarter vs. an initial reading of +0.1%) and Q1-2012 came in at +0.7% vs. +0.0% expected. This has changed the SNB’s tone – they no longer talk about moving the floor higher, but only about defending the floor. This is a major policy change, as the threat of a higher EURCHF no longer seems potent for speculators. Furthermore, Swiss based economists expect inflation to reach +1.0% by August/September due to like-for-like comparison level change.

2.       The EU Debt crisis is very much on the front burner again and the capital flows into Switzerland have increased. Capital flooded into Switzerland again after the Greek election in May, making May 2012 the biggest intervention month in history. If this flow continues for much longer – SNB intervention will reach 100% of GDP soon.

3.       The potential surprise element of a move to a higher floor has been removed by our first point above – higher growth and positive inflation. There is now domestic talk in Switzerland circulating that a EURCHF level of 1.000 is actually fair, and political focus on the EURCHF floor is increasing.

4.       Switzerland is coping well with its strong currency. Don’t forget that with a strong currency, you can always buy your competitor if you can’t compete, and furthermore due to the big corporate structure most of Swiss company earnings are in US Dollars, Euros and Yuan rather than in CHF.

Please also read: George Dorgan at who is one of the leading voices on CHF and SNB.

Policy response before the peg would break: Capital controls
The policy response this and next month could be limited capital controls. There is a long history of capital controls in Switzerland that goes back to the 1970s, the last time Switzerland had a similar issue:

 DEM vs. CHF from 1973 (Gold Standard to 1978 free capital controls)        

DEM vs CHF from 1973

DEM vs. CHF from 1971 to now…

 DEM vs CHF from 1971

The 1970’s capital
The following is an excerpt from an article on Switzerland’s history with capital controls and the potential for their return. 

The 1970s was the last occasion in the post-war period when the Swiss Franc was subjected to such intense buying from international investors that the Swiss authorities intervened with capital controls.

Much of the backdrop was very different – an oil-mediated commodity price boom, serious international inflation, and a recent breakdown of a fixed exchange rate regime. But the symptoms were the same – unwanted appreciation of the Swiss Franc through international capital inflows. 

The chosen methods for capital controls at the time were:

(a) A ban on interest payments to non-resident Swiss bank balance increases (increases so as not to penalise existing holders)

(b) A quarterly charge on non-resident Swiss bank balance increases. The charge varied during 1971-79 between 0% per quarter and 10% per quarter, depending on the capital inflow pressure

(c) Prohibition on the purchase of Swiss Franc denominated bonds, property and other securities by non-residents

(d) Restrictions on non-Swiss-denominated borrowing by Swiss residents. 

All of these measures were very difficult to apply in a consistent and effective way – the Swiss Franc was already so widely held by 1971 that they were found to have little practical effect on the exchange rate (which still appreciated strongly over this period), and by the end of 1979, the Swiss authorities decided that capital controls had been largely ineffective, and potentially damaging to Swiss financial services exports. (Switzerland imposed restrictions on interest payments and charged ‘fees’ on foreign-held bank accounts during the period.) So by August 1980, all substantive exchange controls were removed. 

The following excerpt from Wikipedia’s entry on “capital controls” is an excellent summary of the evolution and thinking on the subject: 

By the late 1970s, as part of the displacement of Keynesianism in favour of free market orientated policies and theories, countries began abolishing their capital controls, starting between 1973 - 1974 with the U.S., Canada, Germany and Switzerland and followed by Great Britain in 1979. Most other advanced and emerging economies followed, chiefly in the 1980s and early 1990s. During the period spanning from approximately 1980 - 2009, known as the Washington Consensus, the normative opinion was that Capital controls were to be avoided except perhaps in a crisis.  

The last sentence, of course, provides the “out” from the conventional wisdom, as the circumstances facing Switzerland and its currency are extraordinary. And rhetoric on capital controls has begun showing up at the highest levels in the government. Swiss Finance Minister Eveline Widmer-Schlumpf said, in evidence to a committee in the Swiss Upper House on December 7 2011, said that her Government was actively considering “capital controls and negative interest rates”.

We are seriously concerned about the options market’s continued pricing of downside risk in EURCHF. A one-year delta risk reversal for EURCHF shows that EURCHF puts are 13% more expensive than EURCHF calls. This is by far the biggest risk-reversal I can recall for EURCHF/DEMCHF since the ERM-crisis in 1992.

It also reflects a view that if the EU fails, or Greece leaves, the biggest risk for a large, one-day move is probably in Switzerland. Of course, the SNB is aware of this, but ultimately one day, SNB will have to go back to market-based prices for its currency. The peg was intended as a support for the Swiss economy, but now it is becoming a heavy burden for the SNB and Switzerland as the EU debt crisis policy response remains one of buying time and extending-and-pretending. Switzerland can’t afford much more of this.

Finally, we will stress now is not the time to be bold on any view towards a break of the peg. We still see a 75% chance of this not happening, but the price of being wrong (the 25% possibility that virtually no market might exist in a 1.20 to 1.00 gap episode) is far too big to risk in my opinion.

Safe travels,





Steen Jakobsen, Saxo Bank’s Chief Economist, writes regularly about the global economic picture for  If you’d like to be notified by email every time Steen writes something new, become a member of – it’s free, and you can sign in using Facebook, Twitter, Google or LinkedIn.  You can see Steen’s previous stories on the Steen Jakobsen page

tobyrobertson tobyrobertson
given that the SNB can just keep printing money and soak it up with more bond issues, is there really a problem for the swiss?...after all it costs ntg to print money and they are receiving foreign exchange (that is presumably worth something even if these foreign reserves actually get devalued). And as you suggest these reserves could then be used to buy foreign assets.
at what point in time I wonder does the ponzi money scheme that the world relies on actually collapse?...I mean how much longer can the ECB for instance print and lend money at 1% to banks, so they can reinvest it in bonds paying 5-7% in order to keep bond rates at manageable levels for the italians and spanish et al?
zoran55 zoran55
dear sir
the difference between price of call and put on one year is swap rate, not an fundamental price difference
put + spot long = call
call + spot short = put
Steen Jakobsen Steen Jakobsen
Zoran - not its not.. its the risk premium .. this is 10 delta risk reversals...
Steen Jakobsen Steen Jakobsen
The options is priced in Relative risk ..swaps is not relevant as its part of the delta calculations..
Hank Hank
Steen, do capital controls and eventual un-pegging pose any additional risk for the Swiss banks (and I don't mean just the big two)? What are the probabilities of some Swiss banks going bust in this crisis? I've read that they run with very high leverage ratios (the highest in Europe), and that makes me slightly worrisome of having money there beyond the insured amount.
st st
Dear Steen, new margin requirements for CHF will work from 14 June 17 o'clock german time (raise from 1 to 2 percent) ? Thanks
Steen Jakobsen Steen Jakobsen
Re capital control - first of all of course its a matter for the Swiss, but history shows that in the past it has not impacted the earnings power of Swiss banks. Swiss banks is still, for what I know, making the bulk of its earnings from Private Banking which should not really be impacted by this.
DorganG DorganG
I have been praying that the floor will break already for 2 months. see my site Greetings from Switzerland
Steen Jakobsen Steen Jakobsen
DorganG is must read on CHF. Enjoy his blog and updates. Owe him part and source credit for inspirations on the above piece.
Hank Hank
Thank you for your answer Steen. However, I'm not completely satisfied with it :) Today Credit Suisse was told by SNB to increase their capital, so if Swiss banks are in such a good position as you imply, why should they? SNB seems to be away ahead of the Basel III schedule ...
Steen Jakobsen Steen Jakobsen
Hank - I'm hoping I am not giving the impression I am a bank analyst - We have an excellent one: Tomas Berggren here, my point is more: All banks are leveraged - the Swiss not worse, but they do have a more rigid regulation (and hence SNB wants more capital) - they have to among other things to report according to Basle III rules already... but to be fair I will ask Tomas to respond to you on the very subject of Swiss banks directly - could you fwd me an e-mail @ - then I will have Tomas come back to you directly? Fair enough? Going to Zurich tomorrow to check out the banks for you :-) No, not really talking at a Tour de Swiss event with Team Saxo... Steen
Hank Hank
Haha. That would be really nice of you :-) I'll send you en email first thing in the morning. Thanks!
Mevo Mevo
It is probably obvious for everybody that maintaining the floor is costly and will cost more, the more it lasts... Stop or continue are both causing some serious troubles. If you think about it, there would be a third (scary) alternative: That Switzerland join the EURO.

And what's crazy is that, the longer this PEG lasts and the EURO sinks, the more probability this scenario slowly gets. Because it "solves" both problems of the "continue" and "stop"...

As mad as it could sound, ever thought about this ?
CostaBrunoDias CostaBrunoDias
Congrats Steen, this was a very useful text at that time as right now still is...great analysis! Great position!


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