How – and will – the SNB react to the weak Swiss Franc?

CHF makes full circle

Back in January 2015 the SNB shocked and shook the financial world by abandoning a cap limiting the Swiss currency. The threshold which had been set at CHF 1.2 for EUR, was scrapped. Some of factors forcing the SNB to made this decision was launch of quantitative easing program by the European Central Bank and too strong Swiss Franc’s exchange rate which had been damaging Switzerland’s export industry and causing the economy to lean towards a recession. As nowadays the exchange rate EUR/CHF has returned to 1.2 francs level, the currency made sort of a full circle. This comes as relief to the SNB – it has longed, in the end, for the weaker Swiss Franc. Since the global crisis burst in 2007, the SNB fought hard to prevent the strong exchange rate of tis currency causing problems to the country’s economy. It went to great lengths – intervening in the financial market with purchase of huge amount of foreign assets. As a result, Swiss balance sheet swallowed to CHF744 billion – the state at the end of 2017. The SNB have in its portfolio of assets like government bonds (68% of total assets), other bonds (11%) and shares (21%). Among them, a huge part are the US treasury securities – worth in total $93 billion at the end of 2017, as compared to just $37 billion in 2015.

Expectations versus reality

The ECB is planning to put an end to its QE program rather sooner than later. It has already aided the Euro spectacular growth in the past year. Since CHF reached what is considered by the SNB a good exchange rate in terms of its influence for the economy, many would expect a change in the central bank’s monetary policy. At this moment, the rates are negative at minus 0.79%, and have been like that since January 2015. The SNB’s shares – listed on the stock exchange – doubled their value since the beginning of this year. Expectations of the SNB’s potential move influence right now not only currencies market, but also bonds and stocks one. But sad truth is that no change will be applied at least till June – that is when the next scheduled monetary policy meeting at the SNB takes places. In the meantime, on Friday, May 4th, Thomas Jordan, the SNB chairman, can offer his comment to the situation at the annual shareholders meeting. While addressing Bloomberg last week, Jordan claimed that the SNB is in no hurry to change its policy. He considers the economic and political situation in Europe as a fragile one. He is afraid that this instability, at some point, could make investors eager to buy Swiss Francs again, as it is regarded as safe haven currency. That would push up its value and the Swiss Franc might become too strong. The normalization of the monetary policy eventually will have to arrive, if the current economic trends stay as they are. However, the SNB would rather wait for the ECB first to drop their QE program for good. Whether, the SNB will choose to hike rates or to reduce its investment is foreign assets first, remains an open matter. The semi-annual report of the US Treasury, published earlier this month, noted that Switzerland has now good opportunity to consider how to sell their foreign assets, as the inflation is positive this year and safe have capital inflow pressures have decreased. Selling of assets gathered by the SNB may only be done via change of the monetary policy. In terms of the Swiss Franc’s exchange rate, with the SNB current policy still in force, what can investors expect? CHF is likely to recover in short term. In longer perspective however, all eyes are on the European Central Bank. If the policy gets tightened, the Euro will go higher in the beginning. Then, if the SNB follows in steps of the ECB, the dynamic of EUR/CHF exchange rate may vary.

For the Swiss Frontaliers, this means that the best euro-franc exchange rate is in the past. However, there are prospects of a better EUR / CHF exchange rate in the near future. Above all, however, SMEs and micro-enterprises in the export industry are pleased about the current development, for which a weak franc means a good euro-franc exchange rate.