A strong currency that hurts exports and risks deflation, or a weak one that hobbles banks and annoys the US - that's the choice Switzerland faces. For now, at least, it seems to have picked the former option. The Swiss franc, backed by a huge balance of payments surplus, is the currency traders love to buy in times of trouble. With global trade war raging, the franc has gained 9% versus the euro since last April.
It stands less than 1% below September's two-year highs.
The gains may be signalling a shift in the Swiss National Bank's currency policy. The SNB has dual mandates - ensuring price stability and supporting the export-led economy - that lead it to intervene to stem franc gains. In 2011, it even imposed a cap on the franc's value, abandoning it only in 2015.
Now the euro-franc rate is about to fall under 1.09 for the second time in a month, a level that triggered interventions over the summer.
But franc sight deposits at local banks, a proxy for measuring SNB interventions, fell to five-month lows of 587 billion Swiss francs ($588.65 billion) in the week ending Dec. 9, a 4.6 billion-franc net drop since October.
The SNB also refrained from following the European Central Bank's recent interest rate cut.
So, what's changed?
Neil Mellor, a currency strategist at BNY Mellon, said the SNB's challenge "is not down to a lack policy tools per se, but rather the likely repercussions of using them."
He was referring to the US Treasury's criticism of currency policies at its trade partners. A Treasury report in May 2019 report put Switzerland 12th on a list of currency manipulators, though it removed it from a monitoring list it was put on in 2016.
The dollar has gained 2% since mid-August against the franc. Since early 2018, it's up 7%.
The next Treasury report is due in December and many reckon the SNB is holding off intervening until then.
"They've not been intervening as much lately," said Marie Owens-Thomsen, chief economist at wealth manager Indosuez. "With respect to the US, my feeling is that they just want to try to fly below the radar."
Investors will monitor SNB comments on the franc at its Dec. 12 policy meeting. In September 2017, the bank tweaked its language to call the franc "significantly overvalued", versus the earlier "highly valued".
The SNB declined to comment. But Chairman Thomas Jordan told Swiss newspaper NZZ am Sonntag that the bank remained in close contact with the US Treasury.
"Our interventions are never intended to weaken the franc at the expense of other economies," Jordan told the paper, adding the SNB only aimed at "combating an excessive appreciation".
Policymakers, including Jordan, would clearly prefer a cheaper currency; in an October speech, Jordan said further franc strength would cause a "gloomy scenario", slowing the economy and increasing unemployment.
A weak franc would help the SNB to avert deflation and boost exports, which make up 65% of Switzerland's annual output. The SNB has little room to cut it benchmark interest rate; at minus 0.75% they're already the lowest in the world.
The financial sector is warning of asset bubbles and damage to savers and pension funds from deeply negative rates. A majority of the more than 2,500 company executives and entrepreneurs surveyed by UBS recently said they were suffering from negative interest rates on cash and savings.
As for deflation, Switzerland has seen three rounds of deflation in the past decade - in 2009, 2012 and 2015-16. With November inflation at 0.1% year-on-year, the threat is back.
Yet Salman Ahmed, chief investment strategist at Lombard Odier, noted this was a far cry from 2015, when inflation was minus 1.5%. The economy is also growing at double the euro zone rate.
"There was a fear of widespread deflation, but inflation is near 0%, so they still have some leeway," Ahmed said.
Finally, observers note Swiss exports such as luxury watches and drugs are not especially price-sensitive. Exports rose last year to record highs despite the franc's 4% rise. And franc strength would cut companies' import costs for raw materials such as metal, cocoa and chemicals.
The franc may strengthen to 1.07 per euro in the next three months, 2% above current levels, predicts Tom Flury, head of FX at UBS Global Wealth Management.
"They can't cut rates forever, and intervention is already a bit limited given that Switzerland might fall into the US currency manipulator pocket, which would be something which, at least from the political side, we wouldn't appreciate too much," he said.
Comments
Comments are closed.