4th September 2017
Jean-Louis Richard, Senior Financial Analyst
In each of its reports about the economic environment, the SNB explains its heterodox monetary policy (negative interest rates, massive purchase of assets actives in foreign currencies) by the “overvaluation” of the Franc.
However, since the beginning of the year, the national currency has lost -6.9% compared to the Euro, the currency in which it makes two third of its foreign trade. At 1.14 Franc for a Euro, the currency of the 19 is only 5% away from its old floor of 1.20, which de SNB defended between 2011 and 2015, in order to protect Switzerland against an excessive rise of its currency.
Since 2011, consumer prices in the Eurozone have risen +5.3% while they decreased by -0.9% in Switzerland. This means that the evolution of the prices justifies an appreciation of +6.2% of the Swiss Franc. Expressed differently, the floor of 1.20 in 2011 would be equivalent to 1.13 as of today, a level that the Franc has already passed.
Another reference point is the exchange rate of 1.65 in 2007. Taking into account the difference in inflation between the Eurozone and Switzerland over the last 10 years, this translates today into 1.47. The Franc would have to lose an additional 29% in order to reach this level. At the time, the Franc was (artificially?) weakened by the financing of “carry trade” (loans in Francs in order to buy assets in other currencies). Since the crisis, the reimbursement of these loans tends to (artificially?) strengthen the Franc…