Debt Crisis : Understanding The Swiss Franc Rise

ForexNewsNow | Published on August 18, 2011 at 5:14 am

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NEW YORK (ForexNewsNow) – The Swiss Franc (CHF) has increased by 25% since January 1 – but what does this mean for Forex traders?

The Swiss franc keeps on climbing against the euro and the Swiss National Bank (SNB) seems unable to reverse the trend. Since Aug. 3, the SNB intervened three times on Forex markets in order to cool tensions, but what were the results? The Swiss franc gained 3.92% versus the euro in two weeks and the SNB acknowledged on Wednesday that the Swiss franc still remains “extremely overvalued,” following a new massive injection of cash.

 

According to the economist Antoine Brunet, president of AB markets, the sudden rise in popularity of the Swiss franc is a logical consequence of the crisis of the two major reserve currencies – the dollar and the euro. In a current context of a joint EU-US Debt Crisis and ongoing doubts about the long-term health of the US economy, the Swiss currency has become a safe haven for Forex traders.

 

This increasing trend has multiple consequences for the Swiss economy, which derives about half of its GDP from exports. Over half of these exports are made in the Euro currency bloc, and the strong exchange rate appreciation creates a serious threat to Swiss economic growth. “This is a major loss of competitiveness for Switzerland, which could suffer a downturn because of its foreign trade,” said Antoine Brunet.

 

Indexing the value of the Swiss franc on the euro?

 

The options available for the SNB are rather limited. While prices fell 0.5% in the first half of 2011, the central bank chose to fight the risks of deflation rather than to tackle the development of the housing bubble, which would have justified a higher interest rate. To resolve this dilemma, all the “unconventional” monetary policy actions are possible solutions. The SNB Vice-President, Philipp Hildebrand, even mentioned last week the possibility of indexing the value of the Swiss franc to the euro. Put simply, “Switzerland could introduce a tax on capital inflows, as did Brazil,” suggests Antoine Brunet. Or “a tax on deposits in Swiss francs from non-residents, as it was already the case in the 1970s.”

 

For now, the government has opted for direct intervention to support it’s currency troubles. Economy Minister Johann Schneider-Ammann stated on Wednesday that Switzerland intends to make use of an expected 2.5 billion Swiss franc ($3.18 billion) budget surplus to invest in a CHF2 billion aid package for Swiss companies impacted by the current overvaluation of the Swiss. The Swiss central bank will also attempt to add further liquidity to the money market in order to moist investor interest in the highly overvalued Swiss franc.

The Swiss government also welcomed the central bank’s choice to add further liquidity to the money market in order to moist investor interest in the franc, that is still over valued, Schneider-Ammann stated in a briefing.

 

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