Swiss National Bank Keeps Cap on Franc

Schweizerische_Nationalbank_(SNB)_-_Zürich_Bürkliplatz_2011-08-18_14-50-36_According to Swiss National Bank (SNB) board member Fritz Zurbruegg, the cap of 1.20 per euro on the franc will remain in place while the global economic recovery proceeds sluggishly due to the risk of deflation and recession.

“The minimum exchange rate will remain a necessary instrument for the foreseeable future,” the policy maker said at a reception of money-market traders in Geneva recently, according to “The monetary policy we have conducted to date will continue to apply without any restrictions.” Zurbruegg explained that, although the gross domestic product of Switzerland is 5 percent above its place pre-crisis level, growth has been driven by domestic consumption due to high immigration and annual output in per capita terms has not yet returned to its pre-crisis level, and the output gap remains negative.

Micheal Casey, Ph.D.  is an international macro-economist and funds manager. “It is not the weak pace of WORLD economic growth that is at issue, although that doesn’t help Switzerland,” says Casey. “It is the weak level of SWISS economic growth, especially in areas such as manufacturing (pharmaceuticals, engineering) where Swiss products are in direct competition with similar products from other countries. Switzerland has undertaken similar monetary measures in the past, most recently in 2011. These measures have generally proven helpful as should the current measures.”

Casey discusses how the decision may affect the relationship between the SNB and speculators. “Although the Swiss National Bank might conceivably get into a war with large speculators trying to push the franc stronger (i.e. below 1.2), the Bank has allies among the large Swiss commercial banks who will generally be happy to use their balance sheets to protect their corporate clients. I would not advise going long Swiss near the boundary.”

Nikolaus Siegfried is a multilingual macro-economist and associate director in asset management. Siegfried says, “By increasing their balance sheets G3 central banks support currencies such as the CHF, which attract safe haven flows. This has dampened growth and affected the structure of the Swiss economy adversely. For example, the contribution of manufacturing to GDP growth has been negative for four of the past five quarters, whereas the contribution of the financial sector has been positive in the last six, i.e. since the beginning of 2012. SNB’s cap is aimed at rebalancing the local economy. We expect that policy to work over the medium term.”

“Since the announcement of the cap,” Siegfried continues, “the Swiss monetary base increased dramatically, indicating that the monetary authorities have conducted unsterilized foreign-exchange purchases. Effectively, these interventions are tantamount to QE via foreign-asset purchases. So far the effects of this policy on local prices have been limited, though. Despite the sharp increase in the monetary base, Switzerland has experienced a mild deflation, while the euro area has seen prices rise. As safe haven flows continue to weigh on the CHF, we expect CHFEUR to trade sideways in a 1,20 to 1,25 range. SNB should monitor closely early signs of credit demand or tapering of CHF inflows, as either might increase volatility of inflation against the present policy background.”

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