Situations like the present one bring up all sorts of situations that had gone quiet along the lines of the Paul Simon lyric.
Hello darkness, my old friend
I’ve come to talk with you again
But a subject we looked at many times in the past is back giving us a nudge.
LONDON, March 7 (Reuters) – The euro briefly sank below parity versus the Swiss franc for the first time in seven years on Monday and held at a 22-month low versus the dollar as soaring oil prices stoked fears of a stagflationary shock that could hammer Europe.
My interest is not this new phase of Euro weakness but the strength of the Swiss Franc and its rise to parity with the Euro. Let me illustrate the point by taking you back to the 15th of January 2015.
The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.
It is hard now to explain what a big deal this was at the time but let me start by noting that it was 1.20 then and 1.00 now and this is how they described 1.20 at the time.
The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While
the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate.
They thought it was so bad they promised this.
The SNB is prepared to purchase foreign currency in unlimited quantities and to take further measures, if
They ended up with so much currency intervention that the SNB became a hedge fund holding over 938 billion Swiss Franc’s worth of foreign currencies. As central banks mostly hold shortish term bonds it was one of the forces driving Euro area yields lower and into negative territory in a form of international QE. In addition it started buying equities ( 20% of the fund) in an attempt to diversify and mostly invested in the US pumping up the price of Apple and Google and the like.
This morning the annual results were released and we were told this.
The profit on foreign currency positions was CHF 25.7 billion (2020: CHF 13.3 billion)
Underneath this there was quite a lot going on.
There was a divergence between bond and equity valuations. A price loss of CHF 16.1 billion was
recorded on interest-bearing paper and instruments. Equity securities and instruments on the
other hand registered a price gain of CHF 37.1 billion
Also Switzerland plunged into the icy cold world of negative interest-rates something from which it has never escaped as they remain at -0.75%. After all that it is now at parity.
There are various reasons for the rise of the Swiss Franc and we can start with its reputation as a safe haven. So to an extent the situation is a bit circular as it is rising because people think it will! Another factor leading to Euro weakness and hence relative Swiss Franc strength is the amount of energy imported by Euro area countries.
Another factor is the relative lack of inflation.
03/03/2022 – The national consumer price index (CPI) increased in February 2022 compared to the previous month by 0.7% and reached the level of 102.4 points (December 2020 = 100). Compared to the corresponding month of the previous year, inflation was +2.2%. This is the result of figures from the Federal Statistical Office (BFS).
As you can see this is much lower than being experienced elsewhere except for Japan and is particularly noticeable in its difference to its neighbour the Euro area. One reason for this is below.
Switzerland has the lowest carbon intensity among all IEA countries, owing largely to the carbon free electricity sector that is dominated by nuclear and hydro generation. ( IEA)
Ironically they had decided to meddle with this.
However, following the 2017 decision of the Swiss people to gradually phase out nuclear power, Switzerland’s energy sector is now undergoing a considerable transition.
I think a change of mind may be on its way but for now Switzerland is in a relatively strong position in an area that this morning is causing a of trouble elsewhere.
UPDATED: European natural gas prices zoom to a fresh all-time high, rising >75% today. Benchmark TTF is trading above €345 per MWh. ** That’s equal to more than $100 per million Btu, or more than to $600 a barrel of oil equivalent ** (I promise you there are not typos there). ( @JavierBlas )
Switzerland does import oil and will be unable to avoid inflation from what seemed to be one of the hot topics on social media over the weekend which was petrol/diesel/gas prices at the pump. But is relatively in a strong position.
Also the economy recovered from the pandemic with relative speed.
According to provisional results available, GDP for 2021 grew by 3.7%.4 The Swiss economy
thus recovered relatively swiftly from the slump experienced in 2020 (–2.4%). By summer
2021, value added had already exceeded pre-pandemic levels.
The SNB has been indulging in the online equivalent of open mouth operations this morning. Via @PriapusIQ
The Swiss Franc Continues To Be Highly Valued
They seem to have forgotten the word “more” in that statement. Followed by the usual promise.
Swiss National Bank Says The Snb Remains Prepared To Intervene In The Foreign Exchange Market If Necessary.
Regular readers will recall that the run-up to the collapse of the SNB exchange-rate peg had as a feature a lot of borrowing in Swiss Francs across eastern Europe.It happened because the interest-rates were lower but ended up losing far more in capital losses as the Swiss Franc soared. There were a lot of Swiss Franc mortgages for example.
Let me start with Hungary this morning.
The forint led the losses among central Europe markets and hit all-time lows of 400 to the euro. By 0909 GMT, it was down 3.4% at 399.0 to the euro…….Last week, the forint posted its biggest weekly loss and has lost more than 8% since Feb. 24, the beginning of Russia’s invasion, ( Reuters)
If you are in trouble against the Euro ( and there was also borrowing in it) you will be in even more trouble against the Swiss Franc.
Poland’s zloty was down 2.25% at 4.9615 to the euro, just off a record low of 4.9625 hit in the session. Last week, the Polish central bank also sold foreign currency for zlotys to prop up the currency. ( Reuters )
The Czech central bank said last week that it was intervening in markets against excessive fluctuations and depreciation of the crown. It did not comment on Monday whether it was active in markets.
The crown was down 0.8% on the day at 25.854 to the euro, falling less than peers in central Europe.
The issue of a strong Swiss Franc has a range of implications. The most obvious is for Switzerland itself where it will help with inflation but will make exports more expensive and imports cheaper. There were stories about the Swiss shopping across the border in the past but for now whilst their Francs go ever further prices have risen by more abroad.
But there is a large international issue from this and the borrowing problem may be reduced but has not gone away as this from January 29th shows.
Legislators in Slovenia will vote on Monday on a measure to make banks repay hundreds of millions of euros to foreign currency borrowers, with lenders warning that the measure would undermine their operations in the Alpine nation. Slovenia was one of a number of eastern European countries where consumers seized on the opportunity to borrow at low interest rates more than a decade ago in currencies such as the Swiss franc, only to face a big hit when exchange rates moved against them during the financial crisis. ( Financial Times)
Slovenia is a Euro area nation so will be affected by its fall. But as we have noted borrowers elsewhere will have been hit even harder as the crown, forint and zloty have been hit harder.
Then there is the issue of the Swiss National Bank which via its foreign currency intervention now has a hedge fund wing. It has lost hand over fist on the intervention which is an issue for the Swiss. This is more complex when we add in the equity and bond profits from its investments although the equity investments are presently in a rough patch. Then there is the wider issue of many markets being effectively propped up by SNB buying.
As a final point I expect them to be defending the parity level so the saga continues.
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