Wells Fargo, Schneider Scrapping Bullish Franc Estimates

Wednesday, 07 Sep 2011 03:51 AM

 

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Wells Fargo & Co. and Schneider Foreign Exchange, two of the most-accurate foreign-exchange forecasters, are scrapping calls for a stronger franc after Switzerland’s central bank imposed a ceiling on its currency.

Wells Fargo, the second-most-bullish forecaster on the franc, revised its 1.06 per euro prediction to 1.20, the level targeted by the Swiss National Bank. Stephen Gallo, head of market analysis at Schneider Foreign Exchange, expected the franc to strengthen to 1.05 per euro by the fourth quarter, the strongest call of 24 strategists tracked by Bloomberg. Gallo, the most-accurate forecaster in the six quarters ended June 30 as measured by Bloomberg News, will issue a revised estimate today. The changes suggest that the foreign-exchange market expects that SNB President Philipp Hildebrand will succeed in his effort to stem the currency’s advance. His previous efforts included 15 months of currency sales that contributed to the SNB’s record $21 billion loss last year, while the franc outperformed 16 major peers since Europe’s debt crisis began in late 2009.

“If you had asked me last week if they would announce the peg I would have said, no they won’t, so here we are,” said Gallo, by telephone from London yesterday. “Something that I’m looking at now is the Norwegian krone. Now that the SNB has essentially cut off safe-haven flows to one degree or another it’s possible the Norwegians will be the next central bank intervening to stop their currency strengthening.”

Franc Falls

The franc fell at least 8 percent against all 16 of its most-traded counterparts yesterday as the SNB is “aiming for a substantial and sustained weakening of the franc,” the Zurich- based central bank said in an e-mailed statement yesterday. “With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs” and “is prepared to buy foreign currency in unlimited quantities.”

The premium for three-month options to sell the euro against the Swiss currency versus those allowing for purchases, a measure of the demand for protection against a higher franc, tumbled to 2.42 percentage points from 4.9735 percentage points a day earlier. Excluding the all-time highs reached last month - - the measure reached 5.36 percentage points on Aug. 9 -- the premium was the most since Bloomberg began collecting the data in 2003.

Switzerland’s currency is the best performer this year among a basket of 10-developed market currencies, appreciating 4.7 percent, Bloomberg Correlation-Weighted Currency Indexes show.

“We’re changing the whole profile with the idea that we believe they mean it,” said Vassili Serebriakov, a currency strategist in New York at Wells Fargo, the third-most-accurate forecaster. “Intervention will succeed in keeping euro-Swiss above 1.20. On the other hand, we don’t think that there is much scope for weakness in the Swiss franc beyond that level because of market pressure.”

Second Opinion

Wells Fargo, based in San Francisco, revised its three- and six-month forecast to 1.20. It expects the franc to weaken to 1.22 during the next nine months.

The franc fell as much as 9.9 percent to 1.21911 versus the euro, from 1.10971, the biggest intraday loss on record. Switzerland’s currency weakened as much as 9.6 percent to 86.27 centimes per dollar.

Societe Generale SA, the second-most-accurate forecaster, expected the franc to strengthen to 1.10 versus the euro, which tied for the eighth-most-bullish forecast before the central- bank move. Lloyds Banking Group Plc had the third-strongest prediction for the franc, forecasting it to appreciate to 1.07 in the fourth quarter.

Likely Outcome

“We’re revising our forecast tomorrow, as near-term, we’re going to have to say more likely than not they are going to be able to hold on to this initiative,” said Jeavon Lolay, head of global research in London at Lloyds yesterday. “The elephant in the room is that if conditions deteriorate in the euro zone, I don’t think it’s likely they could sustain this sort of level.”

The franc had surged to records against the euro and the dollar, hurting exports and eroding economic growth. While the Swiss central bank last month boosted liquidity to the money market and lowered borrowing costs to zero, investor concern that governments may struggle to contain Europe’s worsening debt crisis has continued to push the currency higher.

Investors see the franc as a refuge because the nation has a lower ratio of debt to gross domestic product than the euro area as a whole and expects budget surpluses through 2013.

“1.20 could be pushing it,” Lolay said.

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