MARKET ANALYSIS
The Swiss Franc - where to now?
Recent measures taken by the Swiss National Bank (SNB) to peg the franc to the euro have been widely debated. In our view, the measure is bold, but reasonable and understandable, and we believe the SNB will succeed in maintaining the EUR/CHF above +RZHYHU WKHVH GHYHORSPHQWV DOVR UDLVH D QXPEHU RI TXHVWLRQV ÀUVW ZKDW OHG WR WKLV action and ultimately this decision being made by the SNB; secondly, where is the Swiss franc OLNHO\ WR PRYH QRZ DQG ÀQDOO\ ZKHUH ZLOO LQYHVWRUV FKRRVH WR LQYHVW QRZ WKDW WKH IUDQF QR longer expresses an isolated safe-haven currency?
Over-extended appreciation In our view, leading up to this action, the Swiss franc had over-extended its appreciation to become one of the most expensive currencies in the world. The ongoing debacle in the euro zone, US structural issues and the overall uncertainty surrounding the JOREDO HFRQRPLF HQYLURQPHQW IROORZLQJ WKH ÀQDQFLDO crisis had led investors over the past few years to buy Swiss francs alongside gold as a safe haven. As a result the franc has appreciated by 40% against the euro, 45% against the US dollar and 54% against the %ULWLVK SRXQG ZKHQ FRPSDUHG WR LWV SUH ÀQDQFLDO crisis levels. Even year to date to the end of August the Swiss franc was also the world’s strongest currency, up 16% against the US dollar.
These large price movements not only had an adverse impact on the competitiveness of the Swiss corporate sector, but also prevented the SNB from enacting an independent monetary policy. This was because in the current low yield environment any rise in interest rates in Switzerland would be met with further LQÁRZV LQWR WKH IUDQF WULJJHULQJ HYHQ PRUH FXUUHQF\
appreciation. The SNB has made several attempts to stem this appreciation on a number of occasions over the past year. The ad-hoc interventions proved not only to be costly in monetary and political terms but also damaging to the credibility of the SNB.
Successful intervention We believe interventions can be successful if they have a strong fundamental rationale and are concerted at a G7 level. Alternatively, if the intervention is unilateral as is the case with the SNB, then the central bank in question must have ample credibility and the necessary funds to take on the market should it be required.
The latter point is more important in times of stemming currency weakness as central banks have to use foreign reserves, whereas in stemming currency appreciation the central bank can in theory print ‘unlimited’ quantities of local currency to sell – which LQ LWVHOI KDV WKH DGYHUVH LPSDFW RI FUHDWLQJ LQÁDWLRQ The last major test of the credibility of the SNB was in 1978 when it successfully managed to adopt a
Autumn 2011 | Currency Investor 43
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