The Swiss National Bank dilemma: “to intervene, or not to intervene?”
The Swiss National Bank regularly intervened in the FX markets to prevent the franc from strengthening, yet the SNB remained silent when EUR/CHF approached parity last March, raising questions on whether the bank will tolerate a stronger franc moving forward and what are the risks of betting against the euro at the actual price levels?
The Swiss franc appreciated by more than 10% against the euro between March 2020 and March 2021, on the back of rising safe haven inflows toward the Swiss franc due to the pandemic fears and the war in Ukraine.
On March 7th, the euro-franc tested parity; it was the first time the pair fell to this level since the abandon of the euro-swissy floor in January 2015, which had caused a historical depreciation of the euro against the Swiss franc.
Since the abandon of the euro-franc floor, the Swiss National Bank (SNB) regularly intervened in the foreign exchange markets to prevent the franc from strengthening, as strong franc increases the Swiss goods’ prices in terms of foreign currencies, decreases demand and weighs on economic growth.
Interestingly however, the SNB didn’t intervene in the FX markets as the EUR/CHF approached parity last March, raising questions about why the SNB remained silent faced with the strong franc appreciation.
Will it tolerate a stronger franc moving forward and what are the risks of betting against the euro at the actual price levels?
If there is a time to benefit from a strong franc, it is now
Inflation is perhaps the key reason why the SNB hasn’t jumped in the FX markets to sell the franc against the euro to avoid the franc from appreciating toward the parity against the single currency.
In fact, the strong franc is not ideal for the economic growth, however, it partially protects Switzerland from the rising global inflationary pressures. The consumer price index in Switzerland advanced to 2.5% in April. It is the highest inflation print in Switzerland since 2008, but the figure is still significantly lower than the major trading partners. In comparison, inflation advanced to an eye-watering 8.5% in the US in April, to 7.5% in the Eurozone and to 7% in the United Kingdom.
Therefore, the strong franc helped the Swiss economy printing a significantly lower inflation over the past year, as the strong franc tempered a part of the rising energy and commodity prices, keeping the Swiss inflation relatively close to the SNB’s 2% policy target.
Weakened safe haven demand
Another reason which could explain why the SNB may have refrained from intervening to soften the franc is the existence of safe haven alternatives that offer a better yielding to investors, hence help diverting a part of the safe haven demand from the Swiss franc.
In this respect, the US dollar has been the best safe haven asset, as the significant hawkish divergence from the US Federal Reserve and the rising US yields drove capital to the better-yielding greenback. The broad-based dollar demand resulted in more than 8% appreciation in the dollar against the franc, decreasing the need for active manipulation from the SNB, hence leaving the SNB out of the US’ radar, which often criticized the Swiss officials for currency manipulation and has only, recently, removed Switzerland from the currency manipulator list.
Intervention is costly
Currency intervention comes with a high cost. As mentioned earlier, Switzerland has been part of the US’ currency manipulators list, along with China, Japan, Taiwan, Vietnam, Korea, Germany, Ireland, Italy, India, Malaysia, Singapore, Thailand, and Mexico.
But lately, Switzerland, Vietnam and Taiwan have been removed from that list, even though Switzerland spent CHF110 billion ($119 billion) over the past year to soften the franc.
The US Treasury Department said there was ‘insufficient evidence’ to suggest that the latter countries manipulate their exchange rates. However, the US Treasury warned that it will continue with enhanced engagement with Switzerland, citing that ‘this engagement includes urging the development of a plan with specific actions to address the underlying causes of currency undervaluation and external imbalances.’
SNB credibility and psychological levels
If there is no need for FX intervention, it is better to avoid it.
But those who deal with the Swiss franc know that the SNB is never too far from intervening in case of need. If the Swiss franc strengthens to undesirable levels against the currencies of the major trading partners, the SNB won’t hesitate to put its weight to soften the currency, no matter how threatening the US sounds regarding the question of FX interventions.
And the SNB has built itself a solid credibility over the years, which is perhaps a factor that decreases the bank’s need to intervene. As traders expect the SNB to intervene beyond certain levels, they place their orders accordingly. And the only fear to see the SNB intervene probably prevents the SNB from materially intervening. As such, the self-fulfilling prophecy certainly plays in favour of the SNB in its fight against the strong franc.
However, if the euro-franc slipped and consolidated below parity, the SNB would certainly get involved in the FX market, and make sure that the franc’s strength doesn’t become unbearable for the Swiss economy.
About the Author
Ipek Ozkardeskaya is Senior Market Analyst. She hosts Swissquote’s Market Talk, a daily show on financial markets that gives investors precious insights on the market trends, the breaking news, the freshest data and the latest opinions.
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