Trading Floor
FX Update Video: Swiss Franc dilemma - to peg or not
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The Swiss Franc has appreciated rapidly of late and so has the focus on what the Swiss National Bank and Swiss Government are doing to curb this strength which is hurting businesses and thereby the economy of Switzerland. One much discussed step in markets is a peg to the euro. Despite much market speculation this hasn’t yet materialised. But with attempts to weaken the currency’s strength seen as possibly only providing temporary relief is it only a matter of time before more extreme measures like a peg are taken? Ken Veksler Senior Manager, Trading Advisory, Saxo Bank discusses the Swiss dilemma.
The Swiss have pretty much always had to deal with being seen as a safe haven for investors, but with the currency being more than 40 percent overvalued compared to the euro and reports of Swiss residents leaving the country to buy normal groceries - this is an extreme situation possibly requiring extreme measures like a peg.
The Swiss National Bank has heavily intervened of late by selling large reserves of its own currency. Now it has announced other steps like expanding banks’ sight deposits, among other actions, to flood the market with francs in an attempt to weaken demand and thereby its currency's value. Central bank actions combined with supportive comments from the Swiss government have had a desired, though limited effect in slowing the franc’s gains though the safe haven status is hardly likely to be shaken off by these alone.
Back in 1978 the Swiss currency was pegged to the Deutsche Mark and although considered successful it was later abandoned. There are drawbacks of a peg - like giving up free capital movement or independent monetary policy which Switzerland is known for and has enjoyed and also the very costly consequence of having to maintain the desired rate through buying and selling the franc and euro on a regular basis. According to Ken such aspects make a decision to introduce a peg hardly an easy one to make and thereby reduce the likelihood.
The Swiss have pretty much always had to deal with being seen as a safe haven for investors, but with the currency being more than 40 percent overvalued compared to the euro and reports of Swiss residents leaving the country to buy normal groceries - this is an extreme situation possibly requiring extreme measures like a peg.
The Swiss National Bank has heavily intervened of late by selling large reserves of its own currency. Now it has announced other steps like expanding banks’ sight deposits, among other actions, to flood the market with francs in an attempt to weaken demand and thereby its currency's value. Central bank actions combined with supportive comments from the Swiss government have had a desired, though limited effect in slowing the franc’s gains though the safe haven status is hardly likely to be shaken off by these alone.
Back in 1978 the Swiss currency was pegged to the Deutsche Mark and although considered successful it was later abandoned. There are drawbacks of a peg - like giving up free capital movement or independent monetary policy which Switzerland is known for and has enjoyed and also the very costly consequence of having to maintain the desired rate through buying and selling the franc and euro on a regular basis. According to Ken such aspects make a decision to introduce a peg hardly an easy one to make and thereby reduce the likelihood.
For more of Ken Veksler's commentary about the Swiss Franc and other currencies see hisTradingfloor.com blog