Soaring Swiss Franc

On Thursday 15th January 2015, Switzerland’s franc rose by approximately 30 percent against the much-maligned euro, after the Swiss National Bank (SNB) decided to abandon its three-year old cap at 1.20 francs per euro. This marks the most controversial event in Switzerland since the birth of Sepp Blatter.

For a nation accustomed to sitting on the fence, news of this move sent shockwaves around the world. The SNB’s stunning move came a month after its president, Thomas Jordan, had vowed to defend the ceiling ‘with utmost determination’.

You’re probably wondering, why have the SNB created such a scene? Well, this move materialised in anticipation of an extensive quantitative easing programme from the European Central Bank (ECB). The expected result of this is to increase the demand for safe haven currencies like the franc, and the SNB – the central bank – decided that it wouldn’t be able to defend its self-imposed ceiling given the situation.

The immediate consequences of the U-turn saw a sharp sell-off in Swiss assets – the national stock market lost 10 percent of its value following the announcement. Since then, the franc has exceeded parity against the euro and is now trading at 0.999 francs to the euro. The rationale behind selling assets quickly was therefore an understandable one – investors wanted to flog their goods before their prices were too high that they were unattractive to buyers.

The currency ceiling was initially adopted to fend off safe haven flows from the Eurozone and abate the rising value of the franc. Ordinarily you’d want your currency to be strong but the stronger the currency, the higher the costs of exports – life just isn’t fair sometimes. If you thought a Rolex was pricy, they’re about 15% more expensive now.

The biggest implication of a rising franc against the euro is to the detriment of its export market. Given the fact that 55 percent of Swiss exports go to the Eurozone, they won’t be seeing the biggest return because of the wave of austerity, which has swept over Europe. Uh oh.

Quite franc-ly, banks haven’t fared much better either. Currency broker Alpari, sponsor of West Ham United has been forced to declare its UK arm insolvent because the decision by the SNB had created ‘exceptional volatility and extreme lack of liquidity’ – you can’t forever blow bubbles without liquid. Fear not Hammers fans, West Ham have stated that Alpari’s collapse won’t affect the club. Phew.

There are factors to suggest that this isn’t a Suisse-idal move because every cloud has a silver lining. This move is designed to protect long-term Swiss growth: the three-year ceiling had artificially maintained the value of the franc, in order to appeal to investors. This move is an acknowledgment by the SNB that capping the franc was not sustainable for the long-term.

The Swiss are wonderful technicians, just look at Roger Federer – serene build-up, scintillating execution. Though they may take a hit on exports for the foreseeable future, the prospect of incremental growth will ensure the SNB can sustainably manage monetary growth and retain its customers for the future.

 

By Kamran Khan

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