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Will the Swiss Central Bank Intervene Again?

As jittery markets pushed the euro below the 1.10 level against the Swiss franc for the first time ever on Tuesday, the headache for the Swiss National Bank (SNB) over its limited options to fight the strong franc is turning into a chronic migraine.

Swiss Francs
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In an interview with CNBC, David Bloom, global head of foreign exchange at HSBC, warned the Bank of Japan before it makes any possible intervention to rein in the yen, by pointing out that there is absolutely nothing the SNB can do against the strength of the Swiss franc, and that the SNB failed at intervention in 2010.

Bloom’s plain advice, “Beware, if you are planning to intervene in the currency markets, it better succeed,” stands as a reminder of the heavy losses the SNB nursed as a result of massive euro buying in 2010.

On Sunday, Nick Hayek Jr., CEO of Switzerland's Swatch, the world’s biggest watchmaker, called for renewed intervention by the SNB to defend exporters’ margins and the tourism industry’s profits. Hayek Jr., speaking to SonntagsZeitung, said the SNB should vigorously defend a level around 1.35 against the euro and should ignore criticism of book losses.

In 2010, the SNB incurred losses of 21 billion francs after intervening in the currency markets to keep the Swiss franc from rising. Hayek Jr. states he would rather accept higher inflation than witness damaging repercussions of the strong franc on tourism and exports.

While Neil Mellor, FX strategist at BNY Mellon agreed that “FX intervention is certainly the most obvious means of resolving the SNB’s dilemma …,” he pointed out that “capital controls would be a far more effective option in stymieing the CHF’s rise."

Both options, Mellor pointed out, are fraught with enormous political constraints, and a success isn’t guaranteed. “Either way, the SNB may soon have little choice but to grasp one nettle or other should the market continue to make use of the CHF as a haven from risk.”

Since the beginning of the year, the Swiss franc has risen by more than 16 percent against the dollar and by almost 12 percent against the euro. Second- quarter corporate results in Switzerland have revealed the extent of the damage the Swiss franc has done to companies’ bottom line.

UBS , Credit Suisse , Swatch and Lonza are just a few of the companies that have felt the pinch from the relentless rise of the franc, which is eating into profits as most of the companies’ revenues are generated outside of Switzerland, but their cost bases are predominantly in Switzerland.

The Swiss economy has been surprisingly resilient to the strength of the Swiss franc, however. The latest PMI data for July was unexpectedly steady and even pointed to a rise in manufacturing activity, despite the rise of the franc. However, the Swiss government recently lowered its growth forecast, stating that further appreciation of the franc will threaten economic growth “to a serious degree." Export data for June showed that exports to the EU fell almost 15 percent year on year.