The Swiss Franc has appreciated significantly in the last four days. On Tuesday we reported the biggest upward push. The main reason for the appreciation may be assumed to be that the US had put Switzerland on its watch list for possible currency manipulation. So is Switzerland manipulating the Franc? This was rejected.
Hypothesis regarding the rise in the Swiss Franc
The story goes like this. By adding to this list, the US is exerting subliminal pressure on the countries listed there. If Switzerland is afraid of any reprisals by the USA, the Swiss National Bank (SNB) could feel compelled to suspend its interventions in the Swiss Franc. After all, for years the SNB has been printing Swiss Francs on an extremely large scale. Selling them against the Dollar and Euro in order to weaken the Franc. After all, it does not want Swiss products and Switzerland as a holiday destination to become too expensive for foreigners. Has the SNB now stopped its interventions in the currency market out of fear of the USA? Or has the currency market this week simply taken the publication of the US Treasury Department as an opportunity to push up the Franc? Assuming that the SNB could stop its interventions for the time being. Also, could we theoretically go one step further and hypothetically assume that the SNB is even actively buying Swiss Francs? We do not know, because the SNB never publishes official data on its transactions.
Pressure from Switzerland
Even with the negative interest rate of -0.75%, the SNB has been trying for some time to prevent the Swiss Franc from appreciating. In the last two years without much success. The Swiss Franc was only appreciating. But more and more rumours are circulating in the Swiss banking sector, where the same problem is facing the banks in the Eurozone. Abolished interest rates and on top of that even negative interest rates, which are an additional burden. The interest margins are gone, and with them a good portion of the banks’ income. And the customers are angry that the banks are charging them ever higher fees as a substitute for the interest margin. Current reports from Switzerland show that Swiss bankers are also publicly arguing more and more actively against the negative interest rate policy of the SNB. Pension funds and insurance companies would hardly be able to generate their investment returns. The real estate market is threatening to collapse, etc.
This pressure is of course not a compelling argument for the SNB to raise its negative interest rates now. But the currency market could assume that the trend in the medium term is towards rising interest rates in Switzerland, i.e. up to perhaps -0.50% or -0.25%? We don’t know for sure. There is a lot of talk about a feeling that the SNB seems to be forced to rethink its interest rate policy. As well as its intervention policy in the currency market. This, coupled with global uncertainties and the global zero interest rate environment, means that a further appreciation of the Swiss Franc is conceivable. Of course, we do not know either. But there seems to be little argument to stand in the way of further appreciation. If you click here, you can read an interesting article in the NZZ about the arguments in favor of a stronger Franc.
Currently further appreciating
Currently, the Swiss Franc is at its highest level against the Euro since April 2017. EURCHF was still at 1.0820 on Tuesday, and is currently trading at 1.0741. Even at the moment, the trend is tending to continue to strengthen the Franc (but we do not have a crystal ball). It is hardly likely that the SNB will change its interest rate policy in the short term. It is also unlikely to take a concrete public stance on its interventions. The current appreciation of the Franc is probably more about interpreting everything around it (pressure from Swiss banks and the US, etc.) and seeing what this could mean for the Franc. So there are no hard facts. If there is an intensification in the trade war or any other new geopolitical uncertainty, this could further intensify the run of the capital market towards the Franc.