Thursday, July 26, 2012

Swiss base money spikes as the SNB defends the peg

The Swiss National Bank (SNB) continues to "print" Swiss francs (CHF) in response to the flow of capital out of the Eurozone. As Eurozone residents exchange euros for CHF, the SNB buys these euros and sells (the newly "printed") francs to maintain the 1.2 CHF to EUR peg. As a result Switzerland's monetary base has spiked to record (CHF 274bn).

Swiss base money (CHF MM)

But Switzerland can afford to explode its monetary base for now because the broad money supply (M3) has been growing at 7.4% YoY (within the range of the last 4 years) and inflation has been negative. In fact this the situation looks deflationary given that core inflation is at record lows
GS: - "... despite moderate economic growth, the deflation risk for Switzerland is non-negligible. With the starting point of inflation already so low, a deterioration in the external environment could easily push the Swiss economy into recession, putting further downward pressure on prices.
Switzerland CPI (white) and core inflation (green)

That's why the SNB will vigorously defend the 1.2 peg for the foreseeable future and base money will continue to grow. In fact given the Swiss franc's appreciation in the past few years (up 36% since 2008), some are saying CHF is significantly overvalued and the peg should be greater than 1.2.

CHF per 1 euro (Swiss franc has strengthened by 36% since 2008)
Bloomberg: - The Swiss currency remains 36 percent overvalued against the euro, based on purchasing power parity as calculated by the Organization for Economic Cooperation and Development. That compares with 24 percent for Denmark’s krone.
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