Strong Swiss franc and large current account surplus: a contradiction?

Thomas Jordan, chief of SNB in a speech clarifies this issue. However, as the full-speech is in German we only have to do with the summary in English:

The criticism is that Swiss economy records Current Account Surplus. hence, its currency should appreciate and SNB should stop pegging it at 1.2 per EUR.

For almost 18 months now, the Swiss National Bank (SNB) has been enforcing the minimum exchange rate of CHF 1.20 per euro with the utmost determination. The need for this measure is widely recognised, both domestically and abroad, due to the substantial appreciation of the Swiss franc in summer 2011. At the same time, however, there are isolated voices claiming that given the large current account surplus, the Swiss franc is too weak, and that the SNB should allow the currency to appreciate in order to contribute towards reducing global imbalances.

This view is wrong. Swiss CAS is driven by specific factors:

This view is based on a lack of knowledge about the situation in Switzerland. Specific factors are responsible for the Swiss current account surplus. The balance on the trading account, for instance, makes only a modest contribution. The most important elements with regard to the current account surplus are the following: first, investment income from Switzerland’s substantial net international investment position, second, financial sector earnings from business with customers abroad, which is traditionally of significance for Switzerland, and third, earnings from merchanting, which have risen sharply over the past decade. The current account surplus is also statistically overestimated.

These three most important elements are dependent on developments abroad, international financial markets, and global demand for commodities. The Swiss franc exchange rate, by comparison, does not play a decisive role. There is thus no contradiction between having a strong Swiss franc and a large current account surplus. Nor is the surplus a suitable measure for assessing Switzerland’s share in global imbalances. It is much more the case that Switzerland and its extensive level of direct investment abroad contributes significantly to balanced global economic growth.

Hmmm…Need to look at this more.

More than anything I was amused by this over-estimation of CAS bit (hence emphasized). Most policymakers do not seem to be happy with reporting of their macro data..


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