The amazing Swiss Franc

The remarkable depreciation of the Swiss Franc today (following the 1.20 floor imposed by the SNB on the CHF-euro exchange rate) is sure to be the focus of much academic research in the months and years ahead. This FT article has nice graphics:

24 replies on “The amazing Swiss Franc”

@Philip Lane

I would be interest in the mechanics (simply explained) of how the SNB will stop the franc from rising. Is there a limit to their capacity to do this.
Is this any different from the Chinese manipulating their exchange rate to boost exports?

So Irish banks deposits make their way to Switzerland to be welcomed there, while Switzerland holds down the value of its currency in order to sell more watches and chemicals into Ireland.
And Irish banks deposits make their way to Germany, thereby reducing funding cost for the German government, while the German banks acting through its ECB enforcer, extract every last cent in bonds from Irish banks that they have forced Irish citizens to pay.
And the Irish response is to become more competitive.
It seems to me that we Ireland does not fully comprehend the rules of the game that it is attempting to play in.

I am not sure how much the Swiss will like the idea of printing Francs in ‘unlimited quantities’. It is even more interesting how they started an intervention at approx 1.5 in 2009 and ended it at 1.35 in 2010 because ‘it had worked’. And thirdly the Swiss have very little resources of their own so a strong Franc must have a negative feedback on the currency competitiveness of exports. Swiss have very high productivity levels so high wages generally do not add a great amount to the price of exports. It is also generally true that a strong currency attracts foreign capital which feeds into productivity levels. Is there any evidence that the strong Franc is hurting Swiss exports? Because I can not see any other reason why they should move in this direction. To summarize: I think this will work same as it did before and the long term benefits are questionable. I also feel that Euro is in for some turbulence so if things get really hairy for Euro I would think the SNB will abandon this policy as quickly as it was adopted.

@joseph R

They can just create chf credits and use them to buy Euros and other crosses. What they do with those other currency holdings is interesting. They are carry traders who don’t have to lever up, they can just print as much as they like.

If you read the original Helicopter Ben stuff about deflation escape routes (2002 ish), one of the “tools” he mentions is the purchase of large amounts of foreign bonds. SNB could end up doing this.

One reason people are likely to keep out of their way is that because they can engage in QE in a deflationary environment, you would have to have very secure credit lines to take them on, waiting for them to be forced to reverse because of an inflationary drift.

I can’t recall a bigger one day move in a big currency. It will remind crowded trade merchants that economics is about politics, not just numbers.

If the Swiss can create unlimited Francs for zero marginal cost then I can’t see how the markets can’t but come to heal — exactly as we see.

The talk of currency manipulation and currecy wars seems somewhat confused.

There is always a cost when one prints currency. Inflation now or later depending on the circumstances. Just wait until ECB is forced to ramp up their printing press. Did you hear the Deutsche Bank guy talking about the state of the European banks? Nobody is looking forward to sovereign defaults in Europe so printing press is inevitable for ECB. It will be interesting to see what the Swiss do then. And then there is also the considerable difference in size of the Swiss economy and the EZ.

Highly off-topic and not wanting to distract from the thread but since there might be the odd education professional reading….

Heard a story from a reliable source of young National School children being prevented from visiting the loo if they can’t ask in Irish. Most cannot or take ages to remember the words. Some are not drinking at school for obvious reasons.

This seems utterly bizarre and likely to encourage resentment towards the teaching of the language.

Am I missing something?

Thanks for that.
So we could see the SNB doing what the ECB does not want to do, buy Euro bonds. It is likely to buy the more secure ones of course, thereby reducing bund rates even further but by implication increasing spreads with peripherals.

Amazing how all over the West everyone seem to think that debt overhang does not need to be repaid. There are likely to be major changes in the current FIAT currency system as a result.

The strength of the franc has hit the tourism sector very hard. Over 1000 hotels are “in existential danger” according to the NZZ which also reported on Sunday that at least 25000 manufacturing jobs will go if the stutz doesn’t get back above 1.30

Mercedes reduced all their Swiss prices by 20% yesterday.

There was a fascinating debate on Swiss TV on Friday between the unions and the employers group. 1.20 isn’t going to help much.

Meanwhile Swiss consumers get stuffed with prices that are based on a rate of 1.43. and the NZZ estimates windfall profits of CHF 6bn for suppliers and supermarkets until the end of the year.

I’m sure Univ of Chicago economists will come up with a fundamentals shock that could have moved the CHF 10 percent in one day … supply side disincentives of Italian tax package causing capital flows to Switzerland? … it’s gotta be something other than central bank policy tools!

The Swiss authorities were reported in FAZ over the weekend as saying they would reinvest their euros in German and French gov’t debt alone, not the debt of any other e’zone members.

The average yield on the entire corpus of outstanding German government bonds stands at 1.34%, as at close of business yesterday, according to BAML index data. Germany can reasonably be expected to finance both its (substantial) debt rollovers and new financing at the average rate, and the Swiss action will provide a further downward impetus to German funding costs.


Mercedes reduced all their Swiss prices by 20% yesterday.

A little away from the Swiss issue, but no doubt German industrialists will take note of that.
It is a cautionary note on what would happen if the Dmark returns.

Maybe they buy Irish bonds. They offer good return. Have Noonan on the first Aerlingus to Zurich………

“It is a cautionary note on what would happen if the Dmark returns.”

So they have three choices:

1. Lose money through loss of exports due to strong currency
2. Lose money by giving it to Greeks to keep Euro alive
3. Lose money when Mr. Trichet cranks up the press to keep Euro alive

The world has been in continual financial chaos for nearly 50 years – the banks have made a killing from this volatility.
The only problem is investment in long term life support has been minimal as real investment has been a sheep’s game.
Even bankers need some sort of stability so that they can spend their loot – I sense a change in the waters.
The monetarist extraction gaming of currency pairs which destroys long term planning could be ending soon.
The Swiss Fix could be the first step towards a new Gold standard – which will keep the bankers in the debt business – building a era of stability and then when the time is right start another period of sheep farming.
Same as it ever was same as it ever was.

One thing to stress is that this was not , as some sources have suggested, a “protectionist” devaluation. It was a prudent and necessary response to a crazy capital influx, that really had nothing to do with the Swiss economy

Doesn’t this make you think about the position of Germany?

I mean if Germany wasn’t in the euro, in order to stop a similar appreciation of its currency, it would have to do something like this – i.e. significantly expand the monetary base by pegging.

It would have to risk inflation in the medium to long run to stop itself being priced out of export markets. And what would Germany buy with all the foreign reserves it accumulated…

Someday soon the annointed one will reveal themselves, a great economist, who will face the Wrath of Sinn, by showing how much of a ‘monetary transfer’ went to Berlin owing from the Euro.

Capital influx…strange but that’s how it always happens…floods of US dollars and EU deposits at your doorstep, all looking for a short term parking space and all this distorts every “normal” use for money while your real economy dies on the vine.

It appears that every country needs a) extremely low real interest rates 2) FX volatility to deter really hot money inflows and if these don’t work, then add 3) taxes on capital inflows. If all that fails, explicit capital controls are in order, but these are likely to hit in
the ebb phase of this tide.

Who knows if it works, it appears that the main countries are lining up at the starting blocks, it’s a race to see who can print most and fastest. the loser gets to absorb massive amounts of essentially useless paper from other countries, the problem is that, when this is all over the economies of those that lose will be in tatters.

Golds your only man…although food commodities may do well here too….

The last time the rise of Swiss franc’s value was limited in a similar manner was 1978, when its exchange rate against the German mark was lowered. 
Economic historian Tobias Straumann told the, the Swiss information service, that there are strong parallels between that period and now. He added that the decisive signals sent out by the SNB on Tuesday could have the same effect as in 1978 when the franc depreciated by 20% against the German mark within three weeks.
“I think the chances of success are high because the market now has a clear statement of intent,” he told “The currency markets, exporters and importers are now in a better position to make future calculations.”
The 1978 measures resulted in 7% inflation in the early 1980s. A repeat of these levels depends on how much money the SNB has to print to back its words – – and that depends on how much credibility the central bank has in the markets.
“If the markets believe that the SNB is really prepared to risk price instability then they will not act against this target,” Straumann said. “The SNB would only have to print money if its exchange rate floor is challenged.”

The Financial Times says that the central bank, which is in part privately owned, lost almost SFr20bn last year after fruitless interventions in the foreign exchange markets that left it holding massive quantities of euros and dollars, whose value steadily declined in Swiss franc terms.

The Swiss could alternatively impose a punitive tax on speculative inflows – – it wouldn’t be too difficult to identify the major ones – – above trend deposits from multinationals and significant new inflows in the past 12 months.

This is a little suprising, the Swiss are going to sell francs and buy euros to maintain the rate at 1.20. So a currency peg arrangement. Like Argentina on the U.S. dollar. The Argentines were going the other way selling foreign reserves and buying pesos to fight off pressure on their currency weaking (rather than strenghtening). Argentina only had a limited supply of foreig n reserves so when they ran out they couldn’t maintain the peg. Also there was pressure to weaken to increase exports and decrease unemployment. The Swiss will not be under these pressures. They simply need to keep printing Francs and expanding their money supply to buy Euros. I suppose probable risks are a continued weaking or break up of the Euros. Also inflation?
I would like to hear what Krugman makes of it.
Obviously capital controls like China or Brazil are too frightening for them.

The Swiss Central banks looks like theyll be buying their euros in the form of German and French debt. I wonder what do they predict for the periphery? A nett negative result for the Eurozone except Germany and France. The Euro will appreciate making exports more expensive. At least the Germans and French will benefit from lower interest rate government funding in return. The EFSF should have something built in that if the AAA countries borrowing costs decreases, so do the ‘rescue’ loans.
The periphery could be helped by a monetary easing policy by the ECB. I wonder if we will see this as in October the ECB governing board will contain 4/6 memebers from ‘perhipery’ countires and an Italian will be the President soon.

Earlier this year David McWilliams reported cars leaving Italy being searched by Italian police and customs for large sums of Euros on the Italian Swiss border. The Italians will be pleased by this SNB move.

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