Login

User Name:  
Password::  
Forgot Password?
Sign up with

Join now (it's free)

User Name:
First Name:
Last Name:
Email:
Password::

Fundamentals of the Swiss Franc

Facts
Name / Sign / Code  Swiss Franc / ₣ / CHF
Popularity
Ranking
 4 / 165
 Used in    Switzerland 
Others: 2
 Pegged with euro = at least 1.2 francs
Central Bank Swiss National Bank
www.snb.ch
 Interest Rate  0.5% (July, 2012)
 Inflation Rate  0.2% (2011)
Coins
5 10 20 1/2 1 2 5
Banknotes
10 20  50  100  200  10000
 Printer Orell Füssli Arts Graphiques SA (Zürich)           
 Mint Swiss Mint
www.swissmint.ch
Major Pair USD/CHF
Key
Crosses
EUR/CHF  CHF/JPY
GBP/CHF  CAD/CHF
AUD/CHF  
Most Active
Trading Hours
 London Open  7:00PM ET / 23:00 GMT
 CHF Economic Releases  7:30PM ET / 23:30 GMT
 USD Economic Releases  8:30AM ET/ 12:30 GMT
Correlated Class SMI

The official currency of Switzerland, the Swiss Franc (sign: ₣; code: CHF) is the sixth most traded currency after the US Dollar, Euro, Yen, Pound, Aussie Dollar, accounting for 6.4% of the daily trading.

Rank Currency Code
(Symbol)
%Daily
Share
1 US Dollar USD ($) 84.9%
2 Euro
EUR (€) 31.1%
3
Japanese Yen
JPY (¥) 19.0%
4 Pound Sterling GBP (£) 12.9%
5 Australian Dollar AUD ($) 7.6%
6 Swiss Franc CHF (Fr) 6.4%

Currency Reserve Status: The Swiss Franc represents 0.3% of the world's currency reserve, 5th place after the US Dollar (62%), Euro (24%), Pound (4.1%) and Yen (4.1%).  See global currency reserve table.

However, for such a small country, it holds large foreign currency reserves $526 billion, 5th place after China ($3.3 trillion), Japan ($1.27 trillion), Eurozone ($932 billion), Saudi Arabia ($626 billion) and Russia ($537 billion), which boosts the value of the Franc. List of countries by foreign exchange reserves: here

Even with currency baskets like the US Dollar, CHF is given a representation, albeit the lowest percentage share. 

Basket Index / Currency Weighting
USD Dollar Index
EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), CHF (3.6%)


In terms of pair popularity, USD/CHF is the fourth most active pair after the EURUSD, USDJPY, and GBPUSD, accounting for 4% percent of the daily global trade volume, according to the 2010 BIS survey. 


Central Bank: Swiss National Bank (SNB)



Headquarters Bern and Zurich
Created
 1907
Mandate  Maintain Price and Financial System Stability
 BOJ Governer  Thomas Jordan
Website www.snb.ch

Established in 1907, the Swiss National Bank is mostly privately owned. The primary goal of its monetary policy is to ensure price stability: a rise in the national consumer price index of less than 2% per year. This seems decent enough, and inflation is generally low in Switzerland, which is a good thing. The secondary goal is to ensure an environment for economic growth, which translates as: to weaken the currency (including lowering interest rates, and extraordinary currency manipulations and price pegging) in order to defend its export sector. While the currency is deliberately weakened, the policy frustrates currency traders, for it prevents the currency from strengthening to the degree it should, given the country's relatively more stable economy --excellent current account status, low inflation, low unemployment, manageable debt. 

Gold Reserves: SNB manages the official gold reserves of Switzerland, which amounts to  1145 tonnes as of 2008, valued at CHF30.5 billion. 

Economy

  • Though it ranks as the 27th largest economy in the world, Switzerland has a respectable GDP of 633 billion, with a very high per capita GDP (PPP) of $83,000, fourth highest in the world. On an average wealth per adult basis, Switzerland has the highest at US$540,000 (only country exceeding 500K), making Swiss residents the richest in the world (Oct, 2011). The "relentless appreciation" of the Swiss Franc is the perceived reason for the wealth effect, and behind this appreciation lies other factors. 
  • The Swiss economy follows the typical first world model in respect to economic sectors: small percentile (3.8%) involved in agriculture (think: Swiss Cheese), larger percentile (23%) involved in manufacturing (think: Swiss Watch), and majority (73.2%) working in the service sector (think: banking). 
  • Switzerland has an excellent current account surplus averaging 14% of GDP, which is all the more remarkable given that most OECD countries have chronic current account deficits. Prior to the 1990s the surplus averaged around 4% of GDP, but after 1991, it began an uninterrupted ascent that eventually averaged 14%, a figure usurpassed by OECD countries with the exception of Norway (thanks to its oil revenues), even though Switzerland has no significant natural resources. 
  • Ultimately, though Switzerland does not have the oil like Norway does, it does have legendary (secretive) financial center, with banks the grateful recipient of vast quantities of the world's money. The wealth of the financial sector shows up in two places in the current account, in the surplus of traded services (a decent percent of which is finance related), and the surplus of investment income (money saved from having a good current account and invested abroad via the financial sector). 
  • The goods portion of the current account surplus represents a small though rising part of the surplus. With a skilled labor force, the majority of Swiss exports are precision or high tech finished products, in categories like medicaments, glycosides and vaccines, watches, orthopedic appliances, and precious jewelry. Its top 5 importing partners are Germany, Italy, France and Austria, and its top five exporting partners are Germany, US, Italy, France and Austria. 
  • The Swiss Franc, along with the Japanese Yen, became the new safe haven currencies following the global financial crisis. The Swiss Franc is seen as safe haven currency because of its stellar current account surplus, low inflation, manageable debt levels, and no recent asset bubbles to collapse upon its economy. Many foreign investors bought Swissie (CHF) as funds fled the global crisis and also the euro crisis, causing it to appreciate sharply from 2007 to 2012. 
  • Unfortunately, the Swiss government feared that the unrelenting appreciation of their currency would put in jeopardy the competitiveness of Swiss exports, and intervened in an ad hoc manner from 2007 to 2012, increasing FX reserves multiple times. When this ad hoc tactic did not stop the one way appreciation of the Swiss Franc, the SNB committed themselves in Sept 2011 to a peg of 1.20 EUR/CHF, printing vast quantities of stronger CHF to buy the weaker EUR.  

Here is a table of Switzerland in the big picture of things, next to all its major competitors (Updated as of July, 2012):

Country GDP
(Billion USD)
GDP
(YoY)
Interest 
Rate
Inflation
Rate
Jobless
Rate
Gov.
Budget
Debt 
to GDP
Current
Account
Pop
United States
15094 2.20% 0.25% 1.70% 8.30% -8.70 103 -3.10 311.59
Euro Area
13076
-0.10% 0.75% 2.40% 11.20% -4.10 87.20 -0.40 332.99
China
7298 7.60% 6.0% 1.8% 4.10% -1.10 25.8 4.0 1344.13
Japan 5867
3.50% 0.0% -0.20% 4.30% -9.70 211.70 2.0 127.82
UK 2432
-0.80% 0.5% 2.4% 8.10% -8.30 85.70 -1.90 62.64
Canada 1736 1.80% 1.00% 1.50% 7.30% -1.50 85.00 -2.80 34.48
Australia 1372
4.30% 3.50% 1.20% 5.20% -4.10 22.90 -2.20 22.62
Switzerland 636
2.00% 0.0% -0.70% 2.70% 0.4 48.60 14.00 7.91
New Zealand 142
2.40% 2.50% 1.00% 6.80% -8.4 37.00 -4.30 4.40

Historical Exchange Rate Trends:

2004 to 2008

From 2004 to 2008, the CHF been trending higher against two pairings, USD, JPY, and lower against four others, EUR, GBP, AUD and CAD. 


In the four years prior to 2008, most currencies were trading stronger than the US Dollar, and the Swiss Franc was no exception. The chronic negative current account of the US Economy was pushing down the dollar.  It beat the Japanese yen because most traders had piled knee deep into the yen carry trade (borrowing yen at near zero interest to invest in the assets of other currencies) in order to lever up and speculate on the housing / commodity / currencies booms (bubbles) heavily underway during this time. But it depreciated slightly against other currencies because of the "swissie carry trade": from 2003 to 2007, investors borrowed low interest CHF as a "carry trade" to invest in higher yielding assets (mortgage and private lending in central and Eastern Europe) denominated in other currencies, and this had a dampening effect on the currency appreciation. A higher surplus would normally lead to a stronger currency to ensure long-run balance of payments equilibrium, but the carry trade temporarily drove down value of the franc prior to 2007, though it rebounded quite sharply after 2009.  Traders saw the commodity currencies of the AUD and CAD as more attractive during this time, and thus the reason for their +10% appreciation against the CHF. The Euro gained 6% against the Franc because the euro was the sexy new currency the initial decade following its birth, seen as a formidable rival against the USD. 

2008-2012:

Then came the global financial crisis of 2008, and investors seeking safe haven in the Swiss Franc pushed it far ahead of its rivals: 


The Swiss Franc and Japanese Yen became the new safe haven currencies following the global financial crisis. Swiss Franc had already a legendary reputation of a safe haven currency (think: WWII), and this safe haven status is buttressed by some sound economics: the Swissie enjoyed a current account surplus, budget surplus, low inflation, low unemployment, and no recent asset bubbles to come crashing down upon its economy. So many foreign investors bought Swissie (CHF) as funds fled the global crisis and also the euro crisis, causing it to appreciate sharply. As you can see from the above chart above, Aug-Sept of 2011 saw the Swiss Franc peak against most majors: up 80% against the GBP, 40% against EUR, USD, and CAD, and 20% against AUD. It was flat against the Yen, the other safe haven currency during this time. In exchange terms, the Swissie rose to a historical high of 1.0075 francs per euro in August 2011, following the fallout from the European debt crisis. Switzerland soon became the most expensive place to live.  

Unfortunately, the Swiss government became scared at appreciation of their currency, as put in jeopardy the competitiveness of Swiss exports, and intervened in an ad hoc manner from 2007 to 2012, increasing FX reserves multiple times. When this ad hoc tactic did not stop the one way appreciation of the Swiss Franc, the Swiss National Bank (SNB) committed themselves in Sept 2011 to hold a floor of 1.20 francs per euro, a floor that has in practice been a peg. This policy cannot run out of ammunition: the SNB can always meet the demand for francs against euros by creating new franc-denominated reserves to purchase euro-denominated assets. The Swissie fell off its highs against most pairs when this peg was put in place.

Factors Driving the Value of the Swiss Franc

Indicator
Trend Stats
Graph Relative to Majors
Real GDP Growth Rate 1980-2007: 1.56%
2007-2012: 1.2%

Source: IMF
Current Account
        
1980-2012 Avg: 10.5% of GDP (Healthy)
Source: tutor2u.net
Total Debt 313% of GDP
Household Debt: 118% (very high but qualitatively different)
Corporations: ?
Financial Institutions: ?
Government: 48%


Source: mckinsey.com
Base Interest and Real Interest Rates (Base - CPI) Base Interest Rate
-1996-2008 Avg:
1.62%
-2012: 0.11

Real Interest: 
-1996-2008 Avg: 
0.81%
-2012: -0.11

Consumer Price Inflation (CPI) 1996-2007
0.81% (low)
2008-2012 Avg:
0.71%  (low)


Asset Inflation From 1996-2007:
+ 10% in nominal terms
+ 5% in real terms
-10% below average income


Central Bank
Intervention
Money Printing to Depreciate Currency: 
*Jan 2007 to Aug 2011, prints money to buy to euros in ad hoc manner, to weaken currency
* Sept 2011, official peg: prints money to maintain peg of 1.2 to euro

Real GDP Growth

GDP stands for gross domestic product, and by definition, it is the sum total of the monetary value of all final goods and services bought and sold within the nation. It includes the totality of consumer, investment, and government spending, plus the value of exports, minus the value of imports. Real GDP growth is the GDP growth after inflation is taken into account. 

The real GDP of Switzerland, from 1980-2007, is very steady at 1.56.%. Sure it might a percent lower than the US and UK, but it was arguably more real as it did not derive from borrowing and spending against asset price inflation but instead from current account surplus and savings. The current account had been steadily growing in surplus from near zero of 1980 to 15% of 2012 at the same time that in the UK and US it had been growing in yearly deficits. An increasing yearly surplus meant that the people of Switzerland earned more and could save a lot more than their US and UK counterparts. Swiss consumers spent from steadily increasing salaries and savings, not borrowings against their homes. Savings reached around 35% of GDP by 2000, the highest in the OECD along with Norway and South Korea, at the same time that savings entered record lows in the US and UK.

Since Switzerland had a more conservative financial sector and no housing bubble to speak of, its economy preceding 2007 was not based on an asset bubble mirage; rather it was based on the real growth of a steadily increasing surplus in goods and services.  

In the US and UK, the growth of excessive levels of unproductive debt drove up asset prices until they became bubbles, and when these bubbles burst, wealth was destroyed but the debt remained. Given that there was no asset price inflation, and thus no bubble to burst following the global financial crisis, Switzerland fared much better off post 2007 than its bubble heavy economic counterparts. While the Global Financial Crisis (GFC) caused a 6% drop in real GDP in the UK and US during 2008-2009, the real GDP of Switzerland gained 2.1% in 2008 and only dropped -1.9% in 2009. The recovery was a strong 2.7% for 2010 and 1.9% for 2011, meaning that the economy was reaching new highs, instead being four years off from the old high of 2007.

You can see this more stable economic health of Switzerland by looking at the unemployment picture. While most countries vulnerable to asset bubbles bursting saw unemployment numbers double, often moving from 5% to 10%, unemployment in Switzerland stayed at a very low 3% average. Low unemployment indicates that the overall economic health of the economy is sound and good. 

Current Account and Trade Balance

The broadest measure of trade, the current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). Typically, the balance of trade is the most important part of the current account and thus the current account and trade balance often move in lockstep. Switzerland has remained in a current account surplus since 1980, as we can see from the chart below: 


Switzerland has a strong yearly current-account surplus (10.44% of GDP,  CHF63bn, or $94 billion; 2011). Its current account has been in surplus since 1972 and has steadily grown to the size from 2% of GDP to 10% of GDP. Prior to the 1990s the surplus averaged around 4% of GDP, but after 1991, it began an uninterrupted ascent that eventually averaged 14%, a figure usurpassed by OECD countries with the exception of Norway (thanks to its oil revenues), even though Switzerland has no significant natural resources. While a deficit on the current account means a country is importing more than it is exporting, a surplus means that the country is exporting more than it is importing. The implication for the currency tied to a current account surplus is, long term, appreciation. The greater the surplus, the greater the appreciation. Reason: wealth is flowing into the surplus country from the deficit countries it is trading with. The surplus country then takes this wealth and invests it into the assets of the deficit country, and this investment in turn earns an additional revenue as seen in the investment income of the current account. 

Cumulatively, Switzerland has a 811 billion deficit from 1972 to 2011, which ranks it near the top (most in surplus) of countries with cumulative current balance, just beneath Japan, China, Germany and Russia. You can see this most clearly by going to the cumulative current account balance ranking on Wikipedia (1980-2007): Cumulative Current Account Balance. All these year to year surpluses will have to be matched by a deficit on the financial and / or capital account, meaning that the trade profits are being used to purchase assets of other countries. This 800 billion surplus means Switzerland owes 800 billion more of the world than the world owns of them: Switzerland has earned 800 billion in the last 40 years and invested those sums in other countries's stocks, assets and bonds. While this investment is debt for the deficit country, it earns investment income for the surplus country. 

Let's look into the Current Account in more detail. Here is a nice picture from SNB:

2011 Breakdown:
  • Current account balance was +CHF61bn
  • Trade in goods balance was +CHF14.4bn 
  • Trade in services balance was +CHF45.6bn
  • Net investment income was +CHF31.8bn
  • Net transfers was -CHF11.7b

The chart above accounts for the sectors that contributing the most to the growing current account surplus.

Ultimately, though Switzerland does not have the oil like Norway does, it does have legendary (secretive) financial center, with banks the grateful recipient of vast quantities of the world's money. The wealth of the financial sector shows up in two places in the current account, in the surplus of traded services and the surplus of investment income.  Of the CHF61bn in current account surplus for 2011, approximately CHF45bn consists of the surplus trade in services. Perhaps close to 50% of the export growth in services is led by earnings of the financial services, attributable to the strength of Swiss financial institutions, especially the banks. Next, there is income from direct investment abroad, which varies though is CHF31bn as of 2011. The people of Switzerland have been profiting from their banking system and having been thinking much about their financial future. They have been saving an extraordinary amount (savings reached around 35% of GDP by 2000, the highest in the OECD along with Norway and Korea), and its households (via pension funds and life insurance vehicles) have plowed their savings into investments with a fairly meager rate of return yet, in aggregate, large enough of a return to be significant. As the SNB notes: The main factor contributing to growing current account surplus in 2011 is higher income from direct investment abroad (receipts), which "grew by CHF8billion to CHF35billion...due in particular from higher divident receipts earned by finance companies on their direct investments abroad."

The goods portion of the current account surplus represents a small though rising part of the surplus (now CHF14.4bn). With a skilled labor force, the majority of Swiss exports are precision or high tech finished products, in categories like medicaments, glycosides and vaccines, watches, orthopedic appliances, and precious jewelry. Its top 5 importing partners are Germany, Italy, France and Austria, and its top five exporting partners are Germany, US, Italy, France and Austria. 

It is interesting to note that when Switzerland pegged its currency to 1.20 francs per euro to defend the competitiveness of Swiss exports, it is doing so even when the export of goods does not make up a large contribution to the current account surplus. An appreciating currency would make most Swiss much wealthier, as they could buy more from abroad, but I would guess that powerful interests within the export sector called up their friends in government to help them out and put a peg in place. 

Razor Tip: Traders should watch to see if the current account continues to trend in the positive, staying above 10% of GDP.  The currency of the country with a trade surplus, and/or current account surplus, is usually more attractive than one without. Even if there is a currency peg in place, the currency with a strong current account will always rise against currencies with chronic current account deficits.  

Total Debt Problem

Switzerland's total debt (government, household, corporate and the financial sector) to GDP is around 313%, which, if it were placed in the chart below, would make it similar in size to the total debt of Italy or South Korea, though more similar in composition to South Korea: 


Because McKinsey did not highlight Switzerland's total debt structure, and instead only mentioned it in passing, I can only work with two known areas of Switzerland's debt: household debt and public debt. According to McKinsey, Switzerland's household debt is a considerable 118% to GDP, much higher than the Anglo-Saxon countries like the UK (98%),  US (87%), Canada (91%), and Australia (105%), and well above European countries like Italy (45%), France (48%), and Germany (60%). This high household debt is not a cause for alarm, because of conservative lending practices, as we shall shortly see. The public debt is very low at 48% to GDP, only beaten by Australia (21%) and South Korea (33%), and this low debt bodes well for the future stability of the currency. 

We will now briefly take up the two important Switzerland debt sectors: household debt and public sector debt. 

Household Debt

Interestingly enough, two standard household debt ratios are very high for Switzerland. According to McKinsey, the household debt to GDP ratio of Switzerland is very high at 118% of GDP, noticeably higher than the Anglo-Saxon average of 95% and significantly higher than the European average of 50%. The household debt level is high along a second ratio, the household debt to income ratio. According to Eurostat, the household debt to income ratio for Switzerland is at 171%  for 2010, much higher than the UK's 143% or the US's 130%. Considering that it has one of the highest household debt to GDP ratio, and also one of the highest household debt to income ratios, one would think that Switzerland's households are caught in a debt bubble of the highest magnitude and that housing prices in Switzerland have gone through the roof. Not quite. 

Despite having high household debt ratios, Switzerland's household debt is of a quality much different from its peers. The research from Mckinsey specifically points to Switzerland as an example of high household debt to GDP that is sustainable because Swiss lenders are more conservative, which means that most mortgage borrowers have high incomes and significant financial assets to pay their liabilities. These more conservative lending practices are reflected in the fact that home ownership rate is only around 35%, as opposed to the US rate of 67%.  

As McKinsey notes:

Determining how much private sector deleveraging is needed in any country is difficult. Unlike government debt, where there is significant empirical evidence about what constitutes a sustainable debt level, no guidelines exist for private-sector debt. Switzerland, for example has a far higher ratio of household debt to GDP than the United States (118 percent versus 87 percent), but there is no pressure for Swiss households to shed their debt. This is because Swiss lenders are conservative and most mortgage borrowers have high incomes; the home ownership rate is only around 35 percent. Moreover, these households have significant financial assets to pay their liabilities if needed (7, Debt and Deleveraging).

Because of more conservative lending standards, Switzerland did not experience a housing bubble like many other developed economies.  Home prices in Switzerland stayed at modest levels from 1996 to 2007, growing only 10% in nominal terms, 5% in real terms, and 10% below average income. In contrast, because of more lenient lending practices in the UK, home prices grew 250% in nominal terms, 200% in real terms, and 120% above average income. A majority of the growth in the boom years that preceded the financial crash in the US and UK came from the financial sector busy lending easy credit to everyone, fueling a speculative housing and construction market which formed into the housing bubble, the wealth effect of which lead to consumers spending on borrowed funds. Since Switzerland had a more conservative financial sector and no housing bubble to speak of, its economy prior to 2007 was not based on an asset bubble mirage; rather it was based on the real growth of a steadily increasing surplus in goods and services.  

Many mainstream economists and policymakers saw the rising home prices in the UK and US as a sign that these economies were becoming wealthier, but when their housing bubbles burst, the value of the asset collapsed while the value of the debt did not. Since Switzerland did not have a housing bubble to speak of, it did not suffer a consequent burst, bringing with it loss of wealth and huge debt overhangs. The household sector in Switzerland may choose to pay down their debt in the future, but it is not absolutely necessary that they do so as fast, for their debt level (though high) is backed up by high household income and plenty of financial assets.  

While I would argue that the current trend of policy makers to lower interest rates to record lows in order to restart borrowing is problematic for most countries, because it is attempting to use the cause of the problem (debt) as the cure, low interest rates in Switzerland, when coupled with conservative lending standards, is far less problematic. Interest rates can go very low, but when banks demand high incomes and assets to back up borrowings, there is less borrowing in mass and less easy money to move up speculative asset bubbles. 

Switzerland Government Debt

   

Like everywhere else, Switzerland's public debt had risen over the years, steadily rising from a low 25% of GDP in 1984 to a high of 72% in 2005. But unlike everywhere else, Switzerland's debt did not dramatically increase after the global crisis in 2008 but instead noticeably decreased. Switzerland's debt fell from its 70% high in 2005 down to an average of 50% in the years from 2008 to 2012. Why is Switzerland's public debt decreasing when others are increasing? 

The deleveraging factor is Switzerland's Goverment Budget, which you can see has been moving into steady surpluses since 2005. If a government spends more than it brings in, it has a deficit (negative number), and if it spends less than it brings in, it is a surplus (positive number). Being in any degree of budget surplus, no matter how small, is a major feat. Switzerland's budget surpluses are steadily reducing the size of the government debt, when most developed nations are racing into higher deficits and exponentially larger debts. There were only a few budget surplus countries within the OECD for 2011: 12.5% for Norway, 0.8% in Korea and Switzerland, to a close-to-balanced budget in Estonia and Sweden (at 0.1%).

After 2008, most OECD countries were in negative, and some had severe deficits in 2011, including a -10.3% deficit in Ireland, -10% in United States, -9.4% in the UK, -9% in Greece and -8.9% in Japan. Overall, the financial crisis of 2008 led to a dramatic increase in the public deficits of many advanced economies, with many of them experiencing their highest levels of debt since World War II. This was in large part due to the huge stimulus programs in countries around the world, in addition to government bailouts, recapitalizations and takeovers of banks and other financial institutions. Another contributing factor to the higher deficits was the decrease in tax revenues (Gmag.com). 

With a budget surplus that is decreasing government debt, Switzerland does not have to worry about selling off assets or borrowing or printing money. Indebted and chronic deficit countries these days have to engage in heavy borrowing from residents (internal debt) and from foreigners (external debt), causing interest payments that hamper long-term growth. Moreover, they are increasingly forced to print money to make up for the shortfalls, which causes price inflation and currency deprecation. The governments of these debt ridden countries follow the Keynesian school that believes governments should run deficits during recessions and period of high unemployment to compensate for lack of private demand, but even during the good times, deficits become the norm. Lately there have been economists from the other side arguing that it is more important to reduce the deficit by cutting taxes and government spending, but it is doubtful that cultures habitually used to borrowing and spending beyond their means could dramatically alter their ways. Moreover, it is harder to reduce the deficit during the recession when there is less tax revenue coming in. Swizerland's citizenry and government have been frugal for many years, and their thrifty virtues have helped them avoid the debt issues now plaguing many countries. Gfmag.com notes that "even though a general reduction of the deficit is expected in most OECD countries [by 2013], only Korea, Norway, Sweden and Switzerland will be in positive territory " (Gfmag.com). 

Interest Rates, Inflation Rates, Asset Bubbles


 Source: tradingeconomics.com  Source: tradingeconomics.com  Source: economist.com

The SNB set record low interest rates in the 2000s, with real interest rate in the negative for many years, but these lowered rates did not fuel the housing bubble like other countries. That is because the Swiss financial sector was conservative in their lending practice, making mortgage loans only to those with sizable incomes and assets. Consequently, only 37% of the Swiss population owned homes (in contrast to the 67% in the US). With fewer mortgage loans given out, the housing market did not appreciate much beyond inflation. Home prices in Switzerland stayed at modest levels from 1996 to 2007, growing only 10% in nominal terms, 5% in real terms, and 10% below average income. In contrast, because of more lenient lending practices in the UK, home prices grew 250% in nominal terms, 200% in real terms, and 120% above average income. Also keep in mind that from 1978 to 1990, Switzerland had a real estate boom that grew 150% in nominal terms, and when it broke in 1990, prices fell by 25% and stayed low till 2000. 

But lately things have been changing. It is interesting to note that after 2007, housing prices did start to accelerate. There is also an incipient property bubble underway, with the UBS 'Swiss Real Estate Bubble Index' recently reaching its highest level in 20 years. The reuters article adds that the SNB has repeatedly warned of the risk of a housing bubble in Switzerland, and has pledged to rein in what it sees as excessive mortgage lending. However, it is hamstrung by the need to keep interest rates ultra-low to avoid drawing more speculative international capital into the franc. Ultra low interest rates have whetted borrowers' appetite and mortgage lending in Switzerland has expanded rapidly (with more mortgages being given out than previously). A chart of Swiss house prices can be seen here (note that prices plunged in the early 1990's as a previous housing bubble broke in the late 1980's). 

Switzerland is like the opposite twin to most other countries. When everyone has a current account and budget deficit, Switzerland has a current account and budget surplus; when everyone has a housing bubble that bursts in 2007, Switzerland starts a housing boom. 

Central Bank Intervention

Central banks these days do not work to maintain the strength of fiat currencies backed by nothing. They all attempt to weaken it at different rates of speed for different reasons. If the economy is bad (slowing gdp, high unemployment, overlarge current account and budget deficits), and the currency is depreciating because of the economic problems, the central bank will lower interest rates to spur borrowing, and print money to buy the debt of banks and governments, both activities of which will accelerate the depreciation of the currency. If the economy is good (steadily rising gdp, low unemployment, current account and budget surpluses), and the currency is appreciating because of economic strength, the central bank will lower interest rates, and print money to buy the weaker currency of the country it is trading with, both activities of which are designed to deliberately halt or slow the advance of the currency in order to defend the interests of the export sector.  

Switzerland is an example of a country where the central bank intervenes to deliberately weaken the currency when the economy is too good. 

Switzerland did not have burst asset bubbles and overhanging debt bubbles to necessitate central bank intervention in a Keynsian way -- to lower interest rates and crank up the printing presses to bail out beleagered banks and governments from their own misdeeds. Instead, its central bank feared that its currency was becoming too attractive to foreigners running away from their country's problems. So they lowered interest rates to scare away foreign investment into Swiss Francs, and began an uprececended program of money printing to buy the weakened currencies of their competitors so as to effectively weaken their own currency.

From the SNB balance sheet graph, you can see that the central bank ramped up their currency reserve program post 2007, steadily printing money from thin air and buying euros (which is, effectively, going long EUR/CHF at a time when the EUR/CHF was sinking lower and lower).From 1999 to 2007, the SNB balance sheet was averaging 100 billion. Then from Jan 2007 to Aug 2011, the SNB balance sheet increased from 150%, growing from 100 billion to 250 billion in the space of 5 years. Yet, despite these massive foreign reserve purchases, the Swiss Franc was still appreciating. Aug-Sept of 2011 saw the Swiss Franc peak against most majors in from Jan 2008: up 80% against the GBP, 40% against EUR, USD, and CAD, and 20% against AUD, and flat against the Yen, its safe haven rival at this time. The currency rose to a historical high of 1.0075 francs per euro in August 2011, following the fallout from the European debt crisis.

When the SNB saw that its ad hoc intervention failed to halt the unrelenting appreciation, the SNB commited themselves in Sept 2011 to a formal policy commitment to hold a floor of 1.20 francs per euro, a floor that has in practice been a peg. The SNB has pledged to purchase an unlimited amount of foreign currency reserves in order to defend the peg, as it has become the central bank’s chief monetary policy tool. You can see by the balance sheet that the SNB ramped up their purchases of foreign reserves soon after the Sept 2011 announcement, the balance moving from 250 billion to 380 billion in the space of 1-2 months. Wikipedia now ranks Switzerland as having the sixth largest currency reserves, $525 billion (Sept 2012). Motivating the SNB to pursue this monetary policy path is Switzerland’s offical defence of their export sector. The more the franc appreciates the less competitive Swiss goods become in foreign markets and so a depreciation of the franc would bolster Swiss exports by lowering their global price.

This peg policy has been hugely problematic for currency traders wanting to have a long bias in currencies that are economically sound. I have definately stopped trading the EUR/CHF, as the official peg creates too much of a problem. However, USDCHF, CHF/JPY, and GBP/CHF all have nice short to intermediate term trends that can still be profitably exploited. 

Top
An e-mail with your verification code has been sent to your e-mail address. Please access your in-box and use the verification button or verification code to complete your registration.
You already have an account linked with this E-mail (it maybe standard or social login). Please, sign in with it.
Please, provide us your e-mail so we can verify your account.
Email: