After many years of intervention to lower the Swiss franc’s exchange rate against the euro, Switzerland’s authorities may be embarking on another, potentially tougher battle as USD weakness starts to test their tolerance. While the Swiss National Bank is unlikely to take any action at its meeting this Thursday, they will have considered how to adapt its currency intervention policy to the prospects of a long period of USD weakness after the Federal Reserve’s recent pivot to an ultra-dovish stance.
The problem for the export-reliant Swiss economy is that the trade-weighted CHF has surged to five-year highs, making the country’s exports more expensive overseas. With the E.U. block being Switzerland’s main trade partner, the EUR has firmed this year, suggesting the franc’s rise is largely down to its 4.6% year-to-date gain versus the USD, although on Wednesday it dipped to a seven-week low.
“This is a story not only about the euro, but also it is important for the SNB to mitigate the depreciation of the dollar,” said Valentin Bissat, senior economist at Mirabaud.
Part of the SNB’s problem and the main reason for its intervention policy is that many rushed to buy the safe-haven CHF when a crisis hits. Now, with interest rates at minus 0.75% and in view of its twin mandates of ensuring price stability and supporting exports, the SNB has few other effective options but to intervene to control the CHF. But this policy, particularly if seen as targeting the USD, carries risks, above all that the United States could label Switzerland a currency manipulator, a designation it assigns to countries it thinks are engaging in “unfair currency practices” for a trade advantage.
The latest U.S. report on currency manipulation is due in the coming weeks. Bissat reckons the SNB is already acting against the USD. While it does not disclose what currencies it is buying, sight deposits at commercial banks, a proxy for SNB interventions, have risen even as the EUR strengthened. Bissat estimates the SNB has bought around $20 billion in foreign exchange since the end of June.
Meanwhile, the USD has become more important for Swiss trade, in particular its large pharmaceutical sector, and the United States is Switzerland’s second-biggest trading partner, accounting for 42 billion francs in exports last year. Volatility around the U.S. November elections may also lead to safe-haven flows into the CHF. Peter Kinsella, global head of FX strategy at UBP, expects the CHF to strengthen to 0.89 versus the USD by the end of 2020 and 0.81 by the end of 2021, up from 0.92265 now.
Analysts believe the SNB buys EUR, then uses those to buy other currencies, though it has also intervened directly in USD/CHF, notably during a 2015 franc surge. The SNB declined to comment on its USD strategy, but Chairman Thomas Jordan says he has explained its position to the United States. Officials have said in the past that interventions are aimed at limiting the appreciation of an “overvalued” currency, rather than at deliberate devaluation to help exporters. Mirabaud’s Bissat, however, believes it will be branded a currency manipulator at the Treasury’s next review.
“Until now Switzerland met only two (criteria), their current account balance which is higher than 2 percent of GDP, and the bilateral trade surplus with the U.S., but now they will have the final part, 2% of GDP of net FX purchases,” he said.
The implications for Switzerland are unclear but when the United States added China to the list, it then pledged to engage with the International Monetary Fund to eliminate what it called Beijing’s unfair competitive advantage. Import tariffs could eventually follow. Adding to the SNB’s headaches, the ECB has made clear it will not tolerate too much EUR appreciation.
