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Swiss Franc still too strong for its own good

On January 15, after three years of valiantly battling against a runaway rise of its currency’s value, the Swiss National Bank (SNB) put its weapons down in a chock move that jolted financial markets around the world. The decision to abandon the 1.20 peg against the Euro, while the Eurozone is experiencing many difficulties, comes after the SNB’s realization that such a policy is not sustainable anymore. On that fateful day and after a few hours of a Swiss-franc buying frenzy, 0.85 Swiss francs could buy you a euro. Forex markets have been experiencing unprecedented volatility, investors have lost millions and countries around the world are implementing protective monetary policies to counter impending deflation.

Eveline Widmer-Schlumpf, the Swiss Finance Minister said she expects the EUR/CHF exchange rate stabilize at around 1.10, a level the heavily export-oriented Swiss economy should be able to cope with. “I’m confident that the economy will be able to cope with this decision. Companies are in a far better position than in 2011 when the cap was introduced,” she told the Schweiz am Sonntag newspaper.

Indeed, the decision by the SNB to let the Swiss franc float dealt a big blow to financial markets, but it is also having very tangible repercussions on the real economy that are already apparent, particularly in the luxury, industrial and tourism sectors. Industry experts were reported to have stated that on in five Swiss industrial firms faced a very real threat of going out of business because of their goods becoming so much more expensive to foreign customers.

If the EUR/CHF rate returns to parity, the Swiss economy will most certainly experience very weak growth and rising unemployment.
On February 2nd, after a couple of weeks of cold sweats, the franc weakened by about 2 per cent against the euro, and traded at 1.06. That had been the lowest the Swiss franc had reached since the SNB’s move. This could mean that the negative interest rates on some deposits the SNB introduced in December (before removing the 1.20 cap) are having the desired effect. As deposits are withdrawn out of Switzerland and into higher interest rate markets, demand for the Swiss franc marginally decreases.

There is growing speculation that the SNB has been intervening from behind the scenes to maintain the rate in a 1.05-1.10 corridor that is said to be the central bank’s target to allow domestic export companies to breathe. SNB President Thomas Jordan, who says the whole cap-removal episode is blown out of proportion, refused to comment on such claims.
In parallel, the Euro-zone which is struggling with a painfully stagnating economy, has introduced a series of quantitative easing measures that in turn have a cumulated effect on the Swiss franc. The European Central Bank has initiated a process of massive money printing and is planning on injecting about €1.3 trillion into the economy by purchasing bonds and other assets from private investors, further devaluating the Euro.

The ongoing currency war will leave scars in a situation that can hardly be diffused without important collateral damage. No doubt the Swiss economy will, in time, overcome this sizeable hurdle, but at what cost?

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