As the euro zone crisis grinds on, the pressure on the Swiss franc's peg to the euro is intensifying.
The euro has been grabbing the headlines, what with its existential crisis and all. But next door to the euro zone another epic struggle is taking place.
Faced with a seemingly unstoppable currency, the Swiss have been holding the franc to a floor against the euro since last fall. That was all right when the euro was trading in a relatively narrow band. But as the euro has fallen, maintaining that floor has become much more costly, and some strategists are questioning whether it can hold, especially as concerns about the upcoming Greek election weigh on the market.
If the peg doesn't hold, and the Swissie becomes not just a safe haven but a strengthening one as as well, investors would likely sell euros against the Swiss franc, intensifying the pressure on the common currency.
The strategists at RBC Capital Markets are confident the Swiss will stay firm.
Yes, the Swiss National Bank's euro purchases have increased its reserves, but the levels are manageable, the strategists say. And given the absence of inflation in Switzerland, they argue that "the SNB can maintain the floor, even at the current pace of purchases for several months."
Ken Dickson, investment director for currencies at Standard Life Investments, points out that over the longer term, like two or three years, markets have always broken pegs. But he estimates that the Swiss could maintain the peg against the euro for the next several months.
Then there are the Swiss themselves. On Thursday, Swiss National Bank leaders said they would do what it takes to defend the peg.
