Swiss franc traders challenge SNB as crisis meets negative yields

April 16 (Bloomberg) -- For the first time in seven months, traders are testing the Swiss National Bank’s determination to limit the franc’s strength against the euro as Europe’s resurgent debt crisis drives up demand for safer assets.

The franc breached the central bank’s cap of 1.20 to the euro on April 5 and April 9, and options show investors are predicting even more appreciation. It jumped 1.1% versus nine peers in a basket of currencies in March, the biggest gain since July, and is up 2% from a nine-month low on Jan. 11, according to data compiled by Bloomberg.

Demand for Swiss assets is so strong that investors accepted negative yields at an auction of six-month government bills last week as Spain’s borrowing costs rose toward levels that prompted bailouts for Greece, Ireland and Portugal. The franc is climbing against its peers even after the Swiss central bank repeated a commitment to prevent increases that threaten to bring about deflation and hurt exports.

“As long as there is risk aversion tied to rising euro- region stress, investors will want to buy francs,” Peter Frank, a London-based currency strategist at Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest lender, said in an interview on April 10. “The Swiss franc is an extremely liquid currency, it is tradable throughout all time zones and the economy is very resilient.”

The franc will weaken to at least 1.23 per euro over the next three months as the central bank steps up efforts to counteract its strength, he said.

Estimates Raised

The franc has strengthened against all but one of its 16 most-traded peers in the past three months, according to data compiled by Bloomberg. While gains versus the euro have been limited to 0.5%, it surged 8.7% against the yen and 3.7% versus the dollar.

Switzerland’s currency was little changed at 1.2021 per euro at 3:55 p.m. London time, leaving it 1.1% higher this year. It was at 92 centimes per dollar, leaving its advance since the end of December at 2 percent.

Strategists expect policy makers will keep their pledge. Switzerland’s currency will end the year at 1.23 per euro, according to a Bloomberg median survey of analysts. Still, they’re paring estimates for depreciation compared with the Dec. 31 forecast for 1.26 per euro. The franc will fall to 97 centimes per dollar, a separate survey shows, stronger than a prediction of 98 centimes at the end of last year.

‘Very Overvalued’

The “very overvalued” franc may depreciate to 1.35 per euro within a year, as data from Switzerland weakens and as exports suffer, James Kwok, London-based head of currency management at Amundi, the combined investment arm of Credit Agricole SA and Societe Generale SA, which has about $860 billion under management, said in an e-mail on April 12.

A survey of hedge funds and companies by Societe Generale indicated that confidence in the central bank’s ability to hold the cap past June is fading. While responses from more than 6,600 research clients suggested a “very strong vote of support for the SNB,” some investors doubted it would be able to maintain the floor beyond three months, according to Sebastien Galy, a senior currency strategist in New York.

“The feeling is that probably over the next few months they’ll be able to do what they need to do, but the market is becoming far more uncertain,” Galy said in a telephone interview on April 10. “Unless the SNB intervenes to push away euro-Swiss from current levels, these fears will remain.”

Societe Generale raised its year-end estimate for the franc against the euro to 1.23 from 1.30 in December.

Negative Yields

The franc is a favorite in times of stress because the nation is a financial center and exporter of precision products. The country’s current-account surplus, the broadest measure of trade, is equivalent to more than 10% of gross domestic product, so it doesn’t need outside cash to fund spending. Since 1975, only the franc and the yen have increased in value, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-country currencies.

Investors are piling into Swiss assets even though its bond yields are among the lowest in the world. The 10-year security yields about 1.15 percentage points less on average than comparable securities in the U.S., U.K. and Germany.

Six-month Swiss bills sold at an average rate of minus 0.251% on April 10, the same day Bank of Spain Governor Miguel Angel Fernandez Ordonez said his country’s banks may need additional capital if the economy worsens “more than expected.” Switzerland’s sale of 2021 bonds on April 11 attracted bids equivalent to 3.92 times the amount offered, up from 2.55 times at a sale a year ago.

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