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Swiss National Bank Scraps Hard Franc Ceiling, Replaces With Soft Ceiling Instead Local Press Reports

A little over three years after the Swiss National Bank embarked on one of the most shortsighted attempts to control its currency, one which cost it a balance sheet that has since ballooned to a gargantuan 80% of Swiss GDP, and in the process transforming it into a giant, and money-losing, FX hedge fund whose biggest holding was the fastest depreciating DM currency, the EUR, the SNB - as everyone knows by now - shocked the world, and countless now insolvent retail brokers, when it reported out of the blue that the Swiss cap would be no more, in the process unleashing the most vicious short squeeze in FX history, and sending the EURCHF from 1.20 to 0.80 before stabilizing at around 1.00 (if only before last week's month end window dressing by the SNB meant to dilute the P&L impact of the soaring CHF on its balance sheet).

The aftermath of this historic surge in the Franc is what most now agree will lead to an all out Swiss recession, as not only its export industry just got crushed, but tourism into Switzerland will be drastically reduced as a result of what to foreigners appears as a 20% drop in their purchasing power. Add that to the already well-known woes surrounding Swiss banking, whose deposit-funding model is now long-gone history, and one wonders just what will propel Swiss growth in the future?

In retrospect, what the SNB really did was be the first developed central bank to admit defeat in the global currency wars, realizing that contrary to "popular" Magic Money Tree opinion, it does not have an infinite balance sheet. And now the time has come to pay the price for delaying reality by over three years.

To many this was a welcome move as it means after several years of horrendous monetary policies, Switzerland has finally regained some monetary sense, and while the near-term economic (and stock market) pain may be acute, the long-term will be thankful.

And then, earlier today, we read that the SNB didn't learn its lesson after all, and instead of a hard EURCHF 1.20 floor, it is now unofficially targeting an exchange rate of 1.05-1.10 per Euro, aka a "soft", kinda/sorta Swiss Franc cap, according to Schweiz am Sonntag.

More from Reuters:

Citing unnamed sources close to the bank, the paper said the SNB was operating "a kind of minimum exchange rate against the euro".


"The talk is of a 'corridor' from 1.05 francs to 1.10 francs," the paper said. It also cited a well-informed source as saying the bank would incur losses of up to 10 billion francs, without giving a timeframe.


The SNB's Jan. 15 announcement that it had scrapped its cap of 1.20 francs to the euro - the centrepiece of its monetary policy since September 2011 - unleashed a surge in the value of the currency. After the initial shock, which took it below 0.90 francs per euro, the currency has retreated back to 1.0374 francs, a level still widely seen as strong enough to force Switzerland into recession.

The SaS added that "defending the corridor would cost the SNB as much as CHF10 billion." Actually, if and when the Greek deposits outflow accelerates in coming weeks ahead of the Greek February 28 D-Day, it will cost far, far more.

It is unclear if this story is what official Swiss policy now is as a spokesman for the central bank refused to comment, or if this is merely an attempt at verbal intervention to test if the EURCHF can rise to 1.10 without the Swiss bank buying billions of Euros each day. However, if indeed the story is true, is merely mark the second abysmal decision the Swiss Bank has done since September 2011, because the only difference between then and now is that a) it has lost almost all credibility and b) if and when the 1.05 lower bound is tested, and the CHF surges below the stops, it will not only cost the SNB even more losses but further undermine what little credibility it does have left.

Indeed, as our friend Sean Corrigan put it rhetorically, "So the SNB has a 1.05/10 'corridor' for swissy. Does that mean they now only buy EUR1 not 3 billion a day!?"

Probably yes, but what's worse, there is no "utmost determination" language present anywhere, which means that the lower bound of the corridor will be promptly attacked at which point the story will be quietly retracted, only to reemerge in a few weeks with a "new" corridor suggestion, this one even lower for the EURCHF.