The franc’s relationship with the euro with regards to currency exchange provided by Moneycorp is driven by two things: the Swiss National Bank’s heavily-defended 1.20 floor for EUR/CHF and the rise and fall of tensions in Euroland. For eighteen months there has been no doubt about the SNB’s commitment and the franc’s movements during the last couple of months have underlined the strongly positive correlation between euro crises and franc strength.
In March and early April the franc first weakened, as Italy failed to collapse into anarchy after the indecisive general election, then strengthened, as the EU/IMF/ECB troika supervised the unbelievably ham-fisted bailout of Cyprus, then weakened again when the ECB reassured investors that the Cyprus fiasco would not serve as a blueprint for future rescues. Euro/Swiss covered a range between 1.2400 – 1.2150, the euro falling a net two cents over the period.
For sterling/Swiss the bigger variable was, as usual, the movement of the pound against the euro . GBP/EUR ranged between 1.1350 and 1.19, approximately climbing from the bottom to the top of that range over the month. In the same way that eurocrises drove the franc/euro relationship, so they drove sterling/Swiss. The pound gained a net two cents over the period.
This time the crisis was Cyprus, and the gloriously amateurish “rescue” of that country by the troika. The first shot involved confiscating a percentage of all bank deposits, even those of less than €100k supposedly covered by EU guarantee. That scheme fell at the first hurdle when Cyprus’s parliament failed to deliver a single vote in its favour. The second attempt went through, leaving small depositors with all their money but confiscating a serious chunk from the bigger fish; up to 80% if they happened to have their money with the wrong bank then they may need to quickly use a money transfer abroad service provided by Moneycorp.
Investors were, to say the least, nervous about the strategy, especially when Eurogroup leader Jeroen Dijsselbloem said the Cyprus bailout would serve as the model for any future bailouts in Euroland. For a while the euro suffered from the failure of confidence. But then European Central Bank President Mario Draghi stepped up to the plate, as only he can. Since his “whatever it takes” speech in London last summer Sig. Draghi has had financial markets eating from his hand. He did not disappoint at his monthly press conference in early April.
After first talking of weak growth and the usual “downside risks” he moved on to the bailout of Cyprus. He distanced himself from the Eurogroup president and his suggestion that the Cyprus bailout would provide the blueprint for future rescues. Of the decision to seize bank deposits, the ECB president said “that was not a smart move” and as for future bailouts, “Cyprus is no template”.
Investors have more faith in the ECB president than they do in the jejune shoot-from-the-hip Eurogroup chief. It remains to be seen whether it might be misplaced but the attitude of financial markets, for now, is that Sig. Draghi speaks truth while politicians sometimes might not. The early-March press conference restored their faith in the euro even though that, too, might eventually prove to be misplaced.
A month ago the question – again – was whether there might be room for some upside in the sterling/franc exchange rate. There was. And there may be more.