Shrewd Swiss National Bank (SNB) Excludes Irish Government Bonds

Montreal, Canada

The Swiss National Bank (SNB) isn’t helping to calm jittery European government debt markets.

This morning, the SNB announced that it would exclude future Irish government securities from its portfolio. That marks the first time a European central bank outside of the eurozone has officially refused to own a sovereign debt instrument.

The news didn’t affect Irish government yields.

Switzerland is not part of the eurozone, which grew to 17 members this week as Estonia joined the currency union. The Swiss, however, are part of the much larger EEA, or the European Economic Area, and enjoy the vast economic privileges of cross-border trade.

Germany is Switzerland’s largest trading partner and, ironically, also its biggest nuisance since the emergence of the tax grab more than two years ago by German finance officials.

The SNB is one of the most important peripheral central banks in the world. Though not a major player compared to the Fed, the ECB or The Bank of Japan, the SNB pulls some weight in foreign exchange markets; lately, the SNB has lost billions of francs speculating against its own currency vis-à-vis aggressive EUR purchases since March 2009.

The Swiss want a weaker currency (who doesn’t?) and finally terminated their own quantitative easing program last summer. The mighty franc remains one of the top-performing currencies in the world since the emergence of the credit crisis but has declined against gold. The SNB is worried that deflation, not inflation, is the biggest threat to the economy – a major exporter.

It’s no surprise that investors in Europe are flocking to the franc. Switzerland continues to maintain one of the lowest net debt levels in the world. In 2010, the alpine nation reduced its net debt while most of Europe saw deficits surge.

Investors have unloaded Swiss francs this week following a strong run against the EUR. Yet I suspect this short-lived bout of profit-taking won’t last very long. An auction of Portuguese six-month T-bills saw yields almost double this morning, suggesting the ongoing sovereign credit crisis in Europe’s periphery is far from over.

The EUR remains under pressure. Use short-term Swiss franc weakness as an opportunity to sell EUR if you’re EUR-based. Also, buy gold at these lower prices.

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