I suggest a small detour through Switzerland. Many of you asked me to the topic.
Allons-y …
First, I would like to return to the intervention of the Central Bank of Switzerland (SNB)
The markets were surprised when the Swiss Central Bank has suddenly made a massive purchase of foreign currencies against the Swiss franc on Thursday. It is nevertheless the first time that the institution operates on the Forex since … 1992!
The intervention of the SNB looks like a competitive devaluation. There is no doubt that Switzerland will be criticized. Not protectionism or “every man for himself” it was said! The G20 has already reaffirmed this weekend. But Switzerland is not part of the G20 (a chance!), And I must admit, it has “extenuating circumstances” …
Switzerland “hostage” of international investors
The big game in recent years? Investors borrowed heavily the Swiss franc at rates close to zero. Immediately the money in his pocket, the Swiss franc were sold against other currencies is more profitable … which made the choux gras investors and greatly impaired the Swiss franc. But the crisis has happened, the massive funds unwinding their positions and have acquired the Swiss francs to repay their loans in Swiss currency, which has pushed to the rise.
And above the market, the currency has returned to “safe”, like gold or the dollar. Many investors who purchased the Swiss franc to preserve their capital in the current turmoil. Moreover, you will notice that gold and currency Swiss are totally correlated and evolve hand in hand …
These two factors have boosted the rise of the Swiss franc, which has gained 8% since mid-December against the euro.
But that’s not all …
Number one result: the engine of growth in Switzerland is at standstill
Exports are vital to the Swiss, who are trapped between the mountains, like their Japanese archipelago. That is why these two economies are completely open and therefore highly dependent on exports. Exports generate nearly 50% of Swiss GDP – against 22% for the Euro area, 12% for the United States – and yet this growth engine has stalled because of the rise of the local currency. The impact is serious as the country expects to see GDP decline of -2.5 / -3% over 2009.
Consequently number two: Switzerland imports from deflation
Another consequence of the strengthening of the Swiss franc: imports – 50% of GDP – are “cheap”, thus exacerbating the deflationary pressures in our Swiss friends who expect for 2009 a decline of 0.5% price consumption …
Switzerland not only suffers the financial crisis, but it is doubly affected because of the strengthening of its currency and its dependence on international trade. Same scenario as in Japan …
Poor Switzerland …
Switzerland has struck a major blow
Determined not to let it go. And the least we can say is that it did not go with the back of the spoon. The intervention was no longer free:
First, the SNB has reduced the margin of fluctuation of its main rate a quarter point base, bringing in a range between zero and 0.75% – with a target rate to 0.25% . Thus, it burned all its cartridges, the rate is now irreducible to the lowest since … like the United States, Japan or England.
When you have more flexibility to reduce your rates and you are stuck in the throat, we must find ways to act. That’s why Thursday it sold massively on the Swiss franc against the Forex foreign currency to fight against the excessive rise of the currency.
The effect was immediate and dramatic
The euro jumped from 1.47 to 1.54 Swiss francs. The dollar rose from 1.1592 to 1.1928 Swiss francs! In two sessions, the franc fell by more than 3.5% against the euro and 3% against the dollar – look at the graphics! For the uninitiated, this may seem small, but for regular forex is huge: 540 pips in a flash on the EUR / CHF.