What is happening with the Swiss Franc?

One of the features of the credit crunch era has been the strength of the Swiss Franc. This has been for two interrelated reasons. The first is simply that Switzerland has been seen as something of a safe haven in these troubled times. The second as we have looked at many times comes from what was called the Carry Trade. This involved people and companies from other parts of the world borrowing in Swiss Francs because in something getting ever harder to believe interest-rates were much higher in their own domestic currencies than they were in the Swissy. In particular those taking out mortgages in some parts of eastern Europe with Hungary and Poland to the fore and also in places like Cyprus took out Swiss Franc mortgages to take advantage of the lower “carry” or interest-rate. The catch was the fact that there was an exchange rate risk which was obscured by the fact that the size of the trade put downwards pressure on the Swiss Franc ( and the Japanese Yen which was its currency twin in this regard). Accordingly it looked as if a financial triumph was on its way where interest-rate gains came with exchange-rate benefits. What could go wrong?

As the credit crunch hit there was a safe haven demand for Swiss Francs accompanied by some beginning to reverse their carry trades and the two reinforced each other. This meant that those who had taken Swiss Franc mortgages in eastern Europe found that the amount owed headed higher in their own currency and as the monthly repayments depended on the amount owed they headed higher too. The same happened to business borrowers. As more cut their losses the pressure was built up even more on those who remained. Meanwhile Switzerland was left feeling like a tennis ball bouncing around on a foreign currency ocean with consequences described the summer of 2011 by the Swiss National Bank like this.

The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability.

It was afraid of a pricing out of the Swiss economy as it became less competitive. In September of that year it made something of a ground breaking announcement.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

On that road the SNB became an enormous hedge fund with at the time of writing some 724.4 billion Swiss Francs in its foreign currency reserves. An odd consequence of this is that it would have welcomed this news overnight. From Reuters.

Shares in the world’s most valuable company surged 6 percent after-hours to a record of more than $159, taking its market capitalization above $830 billion.

As 20% of its assets are in equities the SNB will be happy and the last number I saw had it holding some 15 million shares in Apple. However even “utmost determination” apparently has its bounds as this told us in January 2015.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.

So the full set had been deployed in terms of monetary policy of foreign exchange intervention and negative interest-rates. But it was not enough and the retreat by the SNB was followed by another Swiss Franc surge causing worries for not only Switzerland but more losses for those who had borrowed in it.


More recently there has been signs and hints of a possible crack in the dam of Swiss Franc strength. At the end of last week Bloomberg was pointing out that it was at its weakest since the January 2015 announcement and that this was driven by stop-loss buying from Japanese banks. Whilst my career has seen regular episodes of stop-loss buying by Japanese banks across many instruments which begs the question of whether they ever make profits this is an interesting connection between what were the two currency twins. CNBC summarised the situation like this.

The franc fell sharply against the euro in morning deals, trading at 1.13 Swiss francs, a three percent drop on the week. Against the dollar, it hit a month low of 0.9724 Swiss francs.

This morning has seen the Euro rise to 1.143 Swiss Francs as the new beat goes on.

Swiss Cheese

The Financial Times notes that the hole in Swiss cheese production may be in the process of being fixed.


Its competitiveness wounded by the strong Swiss franc, Switzerland has imported more cheese than it has exported in some recent months — an unhappy state of affairs for producers of Gruyère and Emmental. “It would be great to get back to a reasonable exchange rate,” says Manuela Sonderegger, of Switzerland Cheese Marketing.

A real world impact of the exchange rate moves although of course it will take a while for the weaker level of the Swiss Franc to have any significant impact.


There is quite a bit to consider here so let us look at what is in play. We cannot rule out that this is a consequence of thin summer markets but it is also true that a weakening has been in play for a few months. One initial driver may have been the strong phase of the US Dollar offering an alternative but the main player now is the Euro area. The better phase for it economically is now being accompanied by a stronger Euro signalled by the way it has moved above 1.18 versus the US Dollar and in a lesser way by the UK Pound £ being just under 1.12.

Thus the SNB will be hoping for a continuation of the stronger Euro and thus has a vested interest in the next move of Mario Draghi and the ECB. It will be hoping that it will withdraw more of its stimulus measures once the summer and indeed elections are over. Of course now the web gets increasingly tangled as the ECB will not be that keen on further rises in the Euro as it moves it reduces its “price stability” target. This particular currency war is now in the world of strength rather than weakness which of course sends another Ivory Tower or two collapsing as we note there is still 60 billion Euros a month of QE from the ECB.

Also if we look wider there will be implications. For example we may hear a sigh of relief from eastern Europe but also what if the rally continues and the SNB gets the chance to trim its reserves. As it has been a factor in driving equity markets higher would it be a sign of a turn? That is a fair way away from here but much more nearby has been the recent disarray in the claimed safe haven of Bitcoin. It makes me wonder if this has impacted the Swiss Franc but am struggling to think of a causal link.

Let me finish with another potential consequence which would be quite a change which would be an interest-rate rise in Switzerland. Could it get away from negative interest-rates before the next downturn strikes or is it trapped there?



14 thoughts on “What is happening with the Swiss Franc?

  1. Shaun,
    It always struck me as the height of irresponsibility (yes, even worse than PPI, almost on a par with securitised mortgages) for a bank to lend an individual a mortgage based in Swiss Francs, with the asset , a house, based in another currency. For an individual, it just seems crazy to take a currency bet on the biggest debt in your whole life, a debt which is to be repaid over, say, 25 years. It reminds me of all those pensioners from the UK but living in the Eurozone asking for a supplement from the UK Government when their pensions shrank in Euro terms.
    I just cannot understand anyone taking a long term view where their assets or income are in one currency and their debt or outgoings are in another.
    As you say, what could go wrong?

    • Hi James

      I think that many do not understand the potential consequences from what they are doing. Where the foreign currency mortgage saga takes another turn is that we know the banks packaged up and (miss) sold these products. No doubt the sales(wo)mans patter somehow missed out the flaws.

  2. Shaun, I wish I understood FX better to comment here. The only thing I am certain of is that QE is petrol to the flames of a currency war and it is wishful thinking indeed to claim that QE is purely a national and internal monetary tool. The analgous offer in China is rampant lending to State Owned Enterprises…. I guess…?

    • Hi Paul

      I discuss FX regularly because of 2 main things.

      1. It has strong economic effects as I looked at this week in UK terms estimating that the post EU Leave vote lower £ is worth 2.75% in Bank Rate terms.
      2. The media mostly only cover it at what are big points of note whereas of course the real issues are the change in trend and looking to realise it early. By covering it in the way they do the media tend to find themselves on the wrong end of turning points ( the FT at US $1.21 saying the only way is down and they weren’t alone).

      As to QE I recall Noo2 asking about how QE was affecting FX and he had a point. The ECB is still easing in terms of 60 billion Euros a month and yet it has been rallying including today.

  3. Hello Shaun,

    It would be more interesting to discuss why all major western CB all think the same, ie why all are going the NIRP/ZIRP/BIRP route, even those like Sweden.

    there’s a bigger picture here that , the Swiss are just another piece of the puzzle.

    I suspect that the reality is that the Banks are still bust , the economies are stagnant despite the fiddled figures to include things that are impossible to measure accurately ( even though we are given a GDP “boost” , when no such thing has happened.

    and political parties that act like frightened rabbits in the headlights of a car…

    What do you readers think ?

    should I just give in a put on the tin foil hat?

    or just go back to MSM to get re-programmed and think only about the Kardashians ?
    ( oh god not that….)


    one sofa, one bag of popcorn and one doozy of a show 🙂

    • You asked for views, so here goes!
      1. The only way that people feel richer than, say, ten years ago, is because QE has driven up house and share prices;
      2. All those who don’t have those assets feel (and are) poorer;
      3. Those at the lower and have ended up with a mass of debt to afford their lifestyles;
      4. There is now a crazy gulf between old people who have defined benefit pensions (who are laughing) and everyone else, who will get almost nothing;
      5. There seems to be a consensus to focus on tiny movements in GDP to measure the health of the economy;
      6. The MSM is asleep and doesn’t even report really big things, such as the absurd imputed rents as part of GDP, the size of the existing deficit, the way that inflation is measured, QE etc and is generally on the side of high house prices;
      7. There is a simply massive crunch coming, when it is finally recognized that the NHS either needs tons more money or cannot be a life-long free service for all;
      8. Interest rates cannot rise, as then the asset classes above would fall and everyone would feel poorer;
      9. The attention span of the next generation, coupled with the demise of real journalism, will mean that fewer and fewer people will even pay attention to any of the above;
      10. Politicians will therefore promise anything to anyone and hope that it can be paid for by QE.
      The real question is not whether you should buy a tin hat, but when should you do so!
      Rant over…

      • James agree with most of your comments however regarding point 6 the MSM is not asleep it regularly lies and deliberately misrepresents events.

        Interesting about technology stocks this idea that Apple can continue to dominate…Nokia.. Blackberry.?
        How can there be faith in currencies of bankrupt nations like the US $20T debt not to mention its unfounded liabilities led by Trump(Clinton was also unelectable)so the election was a no win scenario.
        The Euro with Greece Italy and Spain on board only surviving because it is up against the dollar pound and yen.
        The whole debt Ponzi scheme is headed for collapse …the only question is when?
        FIAT money always collapses because politicians always print to infinity.

        • And point 8. The kids get their news from varying sources on the interweb .. its the older lot who still buy their once source of news in paper format .

      • “There is a simply massive crunch coming, when it is finally recognized that the NHS either needs tons more money or cannot be a life-long free service for all;”

        It isn’t even now – prescription charges and dentist charges if you’re under 60 and working. Self pay residential/nursing home if you have more than £24500 in assets.

        Whatever happened to “cradle to grave care” funded via National Insurance contributions with nothing else to pay announced by Bevan in July 1948?

    • Ok, so, catching up with your bizarre thinking the Fed isn’t a major CB??!! Only it’s going in the opposite direction…..

  4. Hi Shaun
    Understandably we all find it difficult to accept
    the ways in which the top 1% of the top 1% have prospered.
    Added to that, as James above has stated, those on index
    linked or final salary pensions are milking the future of two
    younger generations. However, we must not forget that the
    top 5% of earners are doing well , so the two aforementioned
    groups have an enormous effect on the median wage,I wonder
    what that would be if these 2 groups were omitted?
    In my view we are headed for a second enormous
    crunch with unknown potential disaster for billions of people
    OR groundhog boom bust cycles OR political unrest.
    If the SNB, Tokyo whale and all the other BIS top
    dogs buy each others stock and debt, what will be left for us?


    • Hi JRH

      Markus has already pointed out the mean/median issue below so let me reply to the QE point. I remember a Societe Generale report early in the credit crunch which suggested the Nikkei 225 could go to 60,000 but what would it buy you? In terms of principle it was rather prescient …

  5. “so the two aforementioned
    groups have an enormous effect on the median wage,I wonder
    what that would be if these 2 groups were omitted?”

    I don’t know numbers, but the median is rather insensitive to outliers so I guess the effect is small. Not on the average though… There the effect will be strong.

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