To recap, the wife of the Swiss National Bank chairman Philipp netted a cool SFr60,000 on a long USDCHF trade, thanks almost entirely to her husband’s decision to introduce a floor in EURCHF. Hildebrand insists he has done nothing wrong, did not know about the trade and maintains he has no intention of resigning.
So far, the conventional wisdom in the FX market appears to be that, while intriguing, the affair will have little effect on Swiss currency policy.
The theory goes that even if Hildebrand does ultimately step down – or is pushed out the doors of the SNB – then there is no reason to suppose that the central bank will not continue with what has been, up to now, a rather successful attempt to rein in the value of the Swiss franc.
However, Merk believes the affair highlights the vulnerability of “celebrity central banking”, in which central banking relies on persona rather than underlying policy.
He says the 2009 attempt to peg the Swiss franc to the euro was mostly driven by Hildebrand; similarly, last year’s introduction of a floor in EURCHF was mostly attributed to Hildebrand.
“The 2009 peg was given up after it proved too expensive,” says Merk. “The 2011 intervention has, so far, held, but it is entirely dependent on the market believing that the SNB will do whatever it takes to keep the Swiss franc from rising.”
He argues that Hildebrand may suffer a loss of credibility as his persona is scrutinised in the current media limelight.
“Importantly, should the market doubt Hildebrand’s conviction, the peg-rate policy may turn out to be amazingly expensive – in 2010, the last time the SNB had aborted its intervention and all those euros purchased had fallen in value, the central bank reported tens of billions in losses,” says Merk.
He adds that policymakers only have themselves to blame with the market’s obsession with their personas, since if they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out.
“The public has a high price to pay for modern celebrity central banking,” says Merk. “We would not be surprised to see the Swiss franc rise against the euro as Hildebrand’s position may be weakened.”