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Foreign Exchange

Swiss National Bank profits on currency gains

The Swiss National Bank announced on Friday it expects a preliminary profit of SFr13 billion for the 2011 financial year, a welcome parting gift from ex-chairman Philipp Hildebrand.

The news is likely to come as a relief to the beleaguered central bank, which was widely condemned domestically for racking up massive losses during its failed currency-intervention campaign in 2009/10 and which earlier this week suffered the loss of Hildebrand after a scandal involving his wife’s trading activities. Hildebrand stood down after it emerged that his wife Kashya had made SFr60,000 on a long USDCHF trade, thanks to his decision to introduce a floor in EURCHF in September.

However, it was not just the Hildebrand family coffers that benefited from the decision.

The SNB said its foreign currency positions would contribute roughly SFr8 billion to its SFr13 billion profit, with valuation gains on its gold holdings adding an additional SFr5billion.

In contrast, the SNB racked up a loss of SFr19 billion in 2010 thanks to its unsuccessful campaign to stem gains in the franc in 2009 and 2010.

The SNB’s most recent initiative, which saw it set a SFr1.20 floor in EURCHF, has been much more successful, with reserve data indicating that the central bank has not had to intervene that aggressively in the market to maintain the boundary.

That might be about to change, however, with traders pushing EURCHF lower in the wake of Hildebrand’s departure.

Hildebrand was widely credited to be the driving force behind the SNB’s currency policy, and some are betting his resignation will lessen the central bank’s determination to enforce the floor now that its reputation has been tarnished.

That sentiment has been underlined by the fact that, although the SNB has installed Thomas Jordan as acting chairman, it appears to be taking its time in appointing a permanent successor to Hildebrand.

Indeed, EURCHF has been steadily drifting lower towards the floor since Hildebrand’s departure, touching lows below SFr1.21.

Adam Myers , strategist at Credit Agricole, says the recent dip in EURCHF should not be seen by investors as a precursor to sustained weakness.

He says, to avoid drawing too much media attention, Jordan is unlikely to want to raise the floor in EURCHF in the near term.

“Such silence, however, should not be mistaken for a lack of policy resolve,” says Myers. “Indeed, with Swiss politicians describing the economy as suffering a ‘small recession’ this week, government planning approval for SNB currency policy appears unlikely to be withdrawn.”

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