Swiss Franc gets pegged to Euro

I am not sure how many crazy things we will see in this continued crisis.

SNB has decided to peg CHF at 1.2 euros . After trying to prevent appreciation of its currency, this talk of pegging was on. I however did not really think this would happen. SNB has finally gone ahead and has pegged the currency to Euro:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

Very stern and tough language from SNB. Using words like “Will not tolerate” indicate some tough talk for market participants.

What is the economics behind this?

  • See basically, people were buying CHF for they thought it to be a safe haven currency. With safe and deep financial ssytem and better fiscal conditions it became a safe haven candidate
  • This led to stiff appreciation of the currency. On comparing the exchange rates from Sep-10 to Sep-11, CHF appreciated by 7.7% against the Euro, 20.7% against the USD, 14.8% against the JPY and 14.8% against GBP.
  • Appreciation in currency leads to lower cost of imports and also makes exports more expensive. In a speech this appreciation was shown as a bigger concern for Swiss exports. It is an export oriented country and massive appreciation leads to sudden pressures on export margins weakening the economy and leading to deflationary fears.
So, it basically puts the floor at 1 EUR =  1.2 CHF. It was trading at around 1.1 CHF before the peg and at 1.31 CHF just an year back. CHF can depreciate from here but SNB will not allow it to move lower than 1.2 CHF. It will buy foreign currency and pump CHF in case their is buying pressure.
These are crazy times for sure. Most such small open economies take a pride in the fact that their currencies are floating and how much they have gained from the same. But now, we have one major such economy beginning to peg its currency under market pressures…
Though I am wondering why peg CHF against Euro? Why not USD? What determines this choice? I would think Swiss would be exporting larger share to Europeans enabling easier conversions etc. Or does it think Euro is a safer currency than USD?

6 Responses to “Swiss Franc gets pegged to Euro”

  1. Martin Says:

    Most Swiss exports are sold in EUR, i.e., most buyers are in Germany and there specifially in Southern Germany (Baden-Württemberg, Bayern).

    And CHF/USD was strongly influenced too trough EUR/USD trades.

  2. shankar Says:

    The currency wars seem to have begun. How will it all end? A collapse of exchange mechanisms? When will the madness end? With major players like US Fed, ECB and BOJ perpetually inflating monetary base and those moving in tandem like PBOC, SNB – things look pretty bleak. It seems that central bankers as a lot are bent on liquidating all savings, anywhere in the world.

  3. nigra Says:

    Well, they might trust the EUR more than the USD and with good right in my eyes: It looks like the USA is on the way out the door, considering the downgrade of creditworthyness. I think that more is to come, maybe a further downgrade. It looks like the US believes that the rules don’t apply to them, that they are immune to bankrupcy, to financial collapse. It remind me of Enron or Swissair, they also thought they were invincible. “Nothing can happen to us, we are the biggest and most successful, we are too big to fail” Well, there are too many interests that feel that they can do whatever they want, strain the system endlessly, because it could never fail, the dollar could never fail. But it might. The Chinese could start switching to Euros and the Euro becoming the new world currency, as the dollar is getting pulled down by the overburdened US economy. As in many empires fall, it is again massive and crazy over expendetures for the millitary and arms, fighting wars in every corner of the world, which benefits a few arms manufacturer, but makes the government balance sheet tilt into the deepest red there is.

    I think that the market growth of the US economy in the last years was actually fake, it was financed on debt. Consumer consumption was on credit and the market it now correcting and contracting to adjust to reality. So in reality it would probably no market growth at all, but a stagnation. Purchases on borrowed money might look real, but they are not, because that money was never there in the first place, although the product was sold.

    My opinion is that the EUR is on more solid footing. The EU and its countries is not squandering billions in pointless military campaigns all around the world, they are working, their companies producing, exporting and focusing on creating peace in other ways.
    The example of Norway shows that Europe has a less violent way of doing things: Unlike the US, they did not beef up their military and police and instituted broad ranging new powers and dissolved citizens rights just on the pretense to protect them from terrorism.

  4. innominfake Says:

    i could not have said it better than the guy above me. very well said friend.

  5. vipit Says:

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  6. Lambert Anoke Mbela Says:

    Floating Regime: Myth or Reality?

    This was the title of an article I wrote on my blog after this news … please read

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