The Losing Battle Against the World’s Most Powerful Currency
The Swiss franc’s persistent strength has posed challenges for export-dependent Switzerland
By BRIAN BLACKSTONE
Updated June 16, 2016 8:32 p.m. ET
ZURICH—The undisputed king of currencies is Switzerland’s franc. And these days, no one is more disappointed by that fact than the Swiss.
Peter Kugler, a professor at the University of Basel, reckons the franc has appreciated at a rate of 1% a year against the dollar and pound—for the past century. The next move higher, which would put further pressure on the country’s exporters and the central bank, could come with the U.K. referendum on an exit from the European Union looming on June 23.
“Should the U.K. vote to leave, we anticipate a stampede,” said Peter Rosenstreich, head of market strategy at Swissquote Bank.
A strong currency has benefits, such as the ability to buy imported goods at lower prices. But that same dynamic, distorted by the relentless gains of the franc, makes it harder for the central bank to keep a healthy level of inflation in the economy. And for a small, export-dependent country like Switzerland, it can be crippling for companies, whose goods become less competitive overseas.
The Swiss National Bank—which made no changes to its monetary policy at a meeting Thursday despite repeating its long-held view that the franc is “significantly overvalued”—has fought a long, losing battle to force the franc back down. It has pushed interest rates deep into negative territory and has bought so many foreign-currency assets—including government bonds, Chinese debt and emerging-market stocks—that its $625 billion portfolio is approaching the size of the country’s GDP.
The problem is investors rush into the franc any time things start to look unstable. In a sense, the franc isn’t functioning like a national currency at all. It is more like a global commodity akin to gold or oil, dwarfing merely national needs.
The franc is the fifth most widely used currency for international loans, even though Switzerland is only the world’s 20th largest economy, behind Saudi Arabia.
There were $8,655 worth of franc notes and coins per Swiss inhabitant in circulation at the end of 2014, according to Bank for International Settlements data—more than twice the U.S. per capita figure for outstanding dollars.
Since taking its modern shape with the formation of the SNB in 1907, the franc has drawn people looking for a safe place to park money amid the chaos of World Wars I and II. The collapse of the gold standard and currency devaluations in France and Italy contributed to its strength, as did Switzerland’s decision to stay out of the European Union.
Switzerland isn’t always alone as a haven. At times, the Japanese yen, Swedish krona and U.S. dollar have played this role.
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What sets the franc apart is its persistent strength. Switzerland has an unblemished triple-A credit rating, low government debt, a conflict-averse government that maintains stability, historically low inflation and a high current-account surplus.
Other currencies have some of these characteristics, but not all of them.
Since 2010, the franc’s weighted exchange rate has risen by 24%, more than any other currency’s, according to BIS data, which covers 60 countries.
Credit Suisse economists estimate the strong franc has cost the Swiss economy $13.5 billion in lost output in the past year.
“It’s a constant, daily struggle in optimizing costs, defining savings and taking actions to cope with the current situation,” said Peter Hackel, chief financial officer of Straumann Holding AG, a Basel-based maker of dental implants.
Like many Swiss companies, it generates a big chunk of its sales abroad. As the franc rises, foreign-currency revenues weaken when they are translated into francs.
Straumann took aggressive steps last year to cushion the franc’s effects, including voluntary bonus cuts for Swiss staff and management to protect earnings targets. It considered asking employees living across the border in France and Germany to take their salary in euros.
The supercharged franc has turned neighboring Germany, France and Italy into bargain warehouses for Swiss shoppers.
On the other hand, hotel stays by foreigners in Switzerland fell almost 4% this past ski season. Meanwhile, the central bank’s deeply negative rates are squeezing pension funds and insurance companies and risk creating destabilizing housing bubbles.
The SNB set a ceiling on the franc’s value against the euro in September 2011. But it was forced to scrap it early last year, because the massive amount of foreign-currency purchases needed to maintain it put the SNB’s balance sheet at risk.
The move into negative interest rates hasn’t worked either. A year and a half ago, the SNB started charging banks a quarter percentage point to hold some of their money. It now charges 0.75%.
SNB Chairman Thomas Jordan insists he hasn’t lost power over the franc, but acknowledges there are some forces outside the bank’s control. “It’s not that our monetary policy has no influence. It is that there are many other influences at the same time,” he said at a news conference Thursday.
In the bond market, the yield on the 10-year Swiss government bond touched an all-time low of minus-0.593% Thursday, according to Tradeweb, and the 30-year bond hit a record low of negative-0.06%. That means investors are signing up to lose money if they hold the bonds to maturity.
In a sign of the policy’s shortcomings, the central bank lost roughly $24 billion last year as the value of its foreign-currency assets fell against the franc.
The franc has risen about 2% against the dollar since a dismal U.S. employment report on June 3 pushed back expectations for Federal Reserve rate increases. It is up about 2% against the euro and 4% against the pound.
Swatch Group AG CEO Nick Hayek has been particularly vocal in complaining about the strong franc and the central bank’s inability to get it under control.
“Our national bank seems a bit lost,” he said in March.
http://www.wsj.com/articles/the-losing-battle-against-the-worlds-most-powerful-currency-1466018375
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(editorial note by JJP... I was asked for some value picks by several investors and money managers this year.... One of the positions that I really like being long 10 and 30 year Swiss bonds, as a deep value play. what I can not convey to those of you who have not been there......... and let me attempt to explain by way of analogy.... The Last song of Jimi Hendrix's first album is entitled "Are you Experienced"....... he posits the question " have you ever been experienced...well I have....... let me show you......"
To be able to get paid back in Swiss Francs.... convertible into Gold...... I'm not here to sell you anything.
But as George Goodman aka Adam Smith wrote in his seminal book "The Money Game" a prudent stewart of capital would have some long dated Swiss Bonds in a deeply diversified portfolio.
JJP
http://www.siliconinvestor.com/readmsg.aspx?msgid=30614984
more on the SNB and the CHF...
http://www.siliconinvestor.com/readmsg.aspx?msgid=30615460
http://www.euromoney.com/Article/3168960/Swiss-franc-special-focus.html
The great unwinding and contraction of Global currency reserves that have the Global Central Banks in a stranglehold... since the middle of 2014
http://www.siliconinvestor.com/readmsg.aspx?msgid=30395108
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