When the Swiss monetary authorities established
a cap for their currency against the Euro in order to prevent it from
appreciating against the Single Currency in a manner that would threaten Swiss
exports, at the height of the global financial crisis, when all the free cash
in the world sought a safe haven, they earned the disapproval of Forex dealers
everywhere for effectively taking the franc out of contention as a trading
currency. But when they removed the cap, as to maintain it was proving too
expensive in terms of Swiss foreign exchange assets, particularly in light of the
effects of Euro zone Quantitative Easing, they caused an explosion on Foreign
Exchange markets that is still felt. See the chart above for an idea of how
dramatic the strengthening of the Swiss currency was on that occasion (a fall
in EURCHF indicates a strengthening franc).
Now the Swissy (EURCHF) is clawing
its way back towards the levels that pertained before the cap was removed. This
must be sincerely welcomed in Zurich .
It is, apparently, due to the new position in which the Euro finds itself, as a
safe haven itself, and as a funding currency for the international Carry Trade
(when interest rates are low, as they are in the Euro zone, institutions will
borrow in the currency of the low interest rate jurisdiction to effectively
loan it out in those countries where rates are high, or are expected to be high
in the future).
…
but major issues are involved in keeping it down
But QE in the Eurozone has not gone
away. In fact there is every reason to believe that it may be added to in the
future, and no matter how resilient the Single Currency has proved to be, its
long-term prognosis is for a weakening bias.
In the meantime, Switzerland is
still the super-attractive economy it has always been. It enjoys a solid,
rigidly sustained unemployment rate of 3.3%. Its industry is amazing, in that
even with the very strong franc that pertains at present, exports are still up
marginally. Bookings for winter holidays, especially from Germany , are
still buoyant in spite of fears that this market would dry up because of the
franc appreciation.
Deflation has also reared its ugly
head in the Helvetic
Republic . Recent Swiss
consumer prices had their sharpest fall in 56 years. But Switzerland
does not have the capacity to engage in QE in order to combat this, which might
tend to weaken the franc, as its bond market is small relative to its global
Foreign Exchange counterparts.
The Swiss economic drama continues.
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