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.
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?