It’s no secret that the Swissy has been moving up the charts with so much swagger like Mick Jagger. Just pull up a chart of any CHF pair and you’ll see what I’m talking about! Both USD/CHF and EUR/CHF recently hit their all-time lows at .7067 and 1.0085, respectively.
As I’ve mentioned in my article a couple of months ago on why you should buy the Swiss franc, the stark contrast between Switzerland‘s economy compared to those of the U.S. and euro zone has made the currency more appealing to investors than the dollar and the euro.
Too bad for the Swissy bulls, the Swiss National Bank (SNB) isn’t a big fan of a strong Swissy. You see, the strong currency makes Switzerland’s exports relatively more expensive as foreigners would need more of their own domestic currency to acquire Swiss products.
But what can the SNB do? Let’s take a look at a few options.
Option 1: Pump up the liquidity even more
When the amount of money available in the economy increases, the Swissy actually gets devalued. This was probably what the SNB had in mind when it announced earlier this week that it would expand its liquidity measures from 120 billion CHF to 200 billion CHF.
Its move to cut interest rates to zero should also increase the money supply. The rationale is, that since the returns on Swissy-denominated assets are lower, investors would have one more reason to invest their money elsewhere and consequently contribute to economic activity.
Heck! There are even those who say that the bank should just make the interest rates negative. Under this scenario, foreign investors would have to pay to open bank accounts in Switzerland and acquire Swiss government bonds, instead of the other way around.
Option 2: Intervention… Duhn, duhn, duuuhn!
Now there are three ways that the SNB can pull off option number two.
The first is outright solo intervention. The SNB used to be notorious for stepping into the markets and selling the Swissy in 2009 and 2010. But when its balance sheet showed that it incurred a massive loss of more than 25 billion CHF for its 15-month-long intervention frenzy, the central bank began to sit on the sidelines.
However, we know from the BOJ’s experience that a solo intervention won’t really do much to keep the currency from rallying. SNB Chairman Hildebrand would probably have to convince other central banks to agree on a joint intervention with some Swiss chocolates. Will it work? Err, I doubt it.
If a joint intervention doesn’t happen, Swiss central bankers can just always resort to good ol’ jawboning. It seemed to have worked when it said that the currency is “massively overvalued.” But of course, the SNB can only pull that off a few times before traders figure out that it’s bluffing and start buying the franc again.
Option 3: Peg the Swissy to the euro
You probably noticed that the Swissy got sold off when the possibility of pegging it to the euro hit the airwaves last week. So why not just tie the two currencies, right?
Uh, there’s one problem. Switzerland’s constitution would have to be changed to cite that the SNB won’t have complete control over monetary policy. That’s a lot of work! So if I were you, I wouldn’t hold my breath for a franc-euro peg to happen anytime soon.
With that said, I don’t see the recent rise in the Swissy pairs as anything more than just a pullback. Sure, some of these options seem perfect in theory. But in this humble old man’s opinion, until we see any significant improvement in the global economy, the Swissy’s safe-haven reputation would still attract investors.
But then again, that’s just me. What do you think should the SNB do to tame the Swissy’s strength?