On the 15th of January, the Swiss National Bank abandoned the fixed exchange rate with the euro.

The previous exchange ratio was set with a cap of 1.2 Swiss franc for every euro. Suddenly the exchange rate started moving and raised the Swiss franc value by 30% in a few hours, arriving at 0.957 over the euro. At the end of the day the price was established around parity. This decision was completely arbitrary and was not apparently due to some specific market constraints. In fact, a central bank can set the Exchange ratio of the local currency below the market level and keep it lower as much as it wants, “printing” the local currency and selling it on the market. In this way the central bank can purchase foreign currencies as an asset. In this case, the Swiss national bank dramatically expanded its assets, which now account for 75% of the Swiss GDP, a level that has been judged as too high. The risk for a central bank is to incur in heavy losses due to devaluation of the main financial assets it has in its portfolio: foreign currencies. What happened today is that the Swiss central bank devalued its own portfolio by 15% losing 19 billion Swiss francs in one day.

If the bank had reacted later there would have been an even greater loss, even if, in theory, a central bank cannot go bankrupt because it can print as much local currency it wants. Why such a move? This could be due to the incoming quantitative easing measures from the European Central Bank (ECB). The quantitative easing (QE) could force the Swiss Central Bank to print even more money because the European Central Bank is printing as well. An agreement seems to have been established between central banks: avoid printing money all at the same time. For example, the ECB waited the end of the first QE program in the USA before starting their Long Term Refinancing Operation and now probably the Swiss central bank wants to understand how much the Swiss franc is going to raise its value before starting to depreciate its currency again.

A higher value of the Swiss franc seems to be a disaster for the country competitiveness. With oil prices falling there will be a poor positive effect on the internal market due to this overvaluation; however, capital is flowing in Switzerland thanks to the low return on oil prices and global low interest rates. In this condition Swiss franc is a safe land for foreign investors. For this reason, in order to control the exchange, the Swiss central bank set a high negative return for investors that decide to deposit their money, charging them about 0.8% of expenses for every three months of deposit located into the Swiss National Bank, and lowering the Libor rate on the Swiss currency from a -0.75:+0.25 range to a -1.25:-0.25 range. This means that the risk free deposit in Swiss franc has a negative return, but despite this, capital is continuously flowing into Swiss banks. On the Swiss stock market, firms producing consumer goods are facing lower stock prices while some oil importer is gaining value, but generally this overvaluation is going to be a problem for manufacturers, because salaries are going to be higher and earnings gained in foreign markets are going to lose their value. A company like Nestlé, one of the main Swiss firm, currently makes 94% of its business in foreign markets thus in foreign currencies. As Nestlé, many other Swiss corporations could face low rate of return and this is why yesterday the Swiss market crumbled down about 11%.

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