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The Holes in the Swiss National Bank's Currency Plan

Laura Ciapponi | Stockbyte | Getty Images

The Swiss have managed to keep the franc in check for several months. Whether they can keep it up is another question.

It's rare for a country to act on its own and successfully curb a currency's rise, but the Swiss have been pulling it off since September.

The problem is, they've had help from the speculative community. And with tensions rising in the euro zone, boosting the appeal of safe-haven currencies like the Swiss franc, that may be fading.

Simon Derrick, chief currency strategist for Bank of New York Mellon, points out that the CFTC's weekly Commitments of Traders report, which measures FX positions for large investors, "show that speculators began to go net short of the currency from early October of last year onwards, indicating a collective belief that the CHF will weaken from here."

But that has shifted. "Since mid-March there has been a noticeable reduction in the size of the net short position noted in the CFTC numbers," he wrote in a note to clients. And sure enough, the franc has been edging higher.

If large investors are reducing their net short positions, that removes a key part of the downward pressure on the Swissie, Derrick says. "In the absence of a significant easing of tensions in the Euro-area, this suggests that the SNB might find itself having to make good on its promise to buy foreign currency to enforce the policy at some point in the near future."

The question then becomes what the Swiss National Bank might do with the new reserves it acquires as a result of an intervention. It's hard to say at this point, but Derrick has one idea: "yet another surge in demand for northern European “safe-haven” assets could emerge in the not too distant future," he says.

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