Swiss franc – what the economists say


Powered by Guardian.co.ukThis article titled “Swiss franc – what the economists say” was written by Staff writers, for The Guardian on Thursday 15th January 2015 13.23 UTC

Jeremy Cook, chief economist at currency dealer World First

The Swiss National Bank has thrown in the towel and given up trying to weaken its currency in the face of outright deflation and a falling European single currency.

This is a complete capitulation. The pressure and belief that the European Central Bank will launch a bond buying programme in the coming week – further devaluing its currency – has been enough to make the Swiss National Bank step out of the way. Nobody wins when you stand in the way of a freight train, except for the train.

Kathleen Brooks, research director at Forex.com

The SNB has close ties with the European Central Bank (ECB). This move could be a sign that the SNB thinks (or knows) that the ECB will embark on QE at next week’s meeting, and the size of its QE programme could be bigger than the market expects – perhaps tn, not the 0bn that was “leaked” last week.

If the SNB is so spooked it is disbanding a policy that it has held dear since 2011, then the rest of the market may want to reconsider their expectations for next week’s ECB meeting.

Stephen Lewis, chief economist at ADM Investor Services International

Central banks around the world are likely to be on alert following the extreme reaction in currency markets to the change in Swiss National Bank policy. The current state of markets may be no less crisis-prone than in pre-2007 times. The threat that international regulators have so far failed to address is that which arises from global investors’ practice nowadays of running mismatched currency positions as between assets and liabilities. The so-called “carry trade” is one that could yet occasion serious trouble for international markets and the global economy. To meet this threat, though, regulators would have to extend their monitoring of the financial system well beyond the banks. This is, indeed, a direction in which some of them would like to move. In the meantime, central banks will be on the lookout for the incipient signs of distress that might portend more generalised problems. If nothing else, Thursday’s market action serves as a reminder that current conditions are far from the old “normal”.

Ipek Ozkardeskaya, market analyst at Swissquote Bank

The panic situation in the Swiss franc is expected to continue until a new game plan [emerges]. In its official communication, the SNB stated that “divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. […] In these circumstances, […] reinforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified”. But we believe that any intervention from the SNB would be similar to dropping a handful of sand on the beach. The volatilities are expected to continue.

Alex Dryden Global Market Strategist at JP Morgan Asset Management

This move wasn’t completely unexpected; it was becoming increasingly painful for the SNB to maintain this support for the Swiss currency cap. That said, the additional interest rate cut is a surprise and it will now mean investors will have to pay around 80 basis points to hold Swiss currency on deposit for three months. The SNB hopes that this will dissuade investors from viewing the Swiss Franc as a safe-haven and therefore avoid a negative shock for the Swiss economy.

Jan Dehn, head of research at fund manager Ashmore

The prospect of QE from the ECB is now triggering reactions in non-euro countries, such as Switzerland. The Swiss National Bank on Thursday decided to pre-empt ECB QE by cutting interest rates by 0.5% to -0.75%, while at the same time removing the 1.20 euro cap for the exchange rate. Indications are that SNB immediately began to intervene to weaken the CHF. Investors will now effectively be charged 75 basis points for the pleasure of investing in Switzerland.

Bear in mind the broader backdrop for this. Currencies are becoming more and more important drivers of global sentiment and the global backdrop therefore remains extremely volatile.

In 2014, Japan embarked on a brash new experiment to create inflation and weaken its currency in an attempt to grow at the expense of other countries. Europe is set to follow suit very shortly.

Monetary policies in Japan and Europe amount to “beggar thy neighbour” policies; they are substitutes for proper domestic adjustment and reform. They transfer the cost of adjustment to other countries. It is by no means certain that these policies will work; they do not address any underlying structural problems.

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