For those concerned about the prospect of a round of competitive currency devaluations, the Swiss National Bank’s abrupt move on Thursday to intervene to push down the Swiss franc raised alarm bells.
It was the first time a leading central bank has intervened in the forex markets since Japan sought to weaken the yen in 2004, as Peter Garnham, the FT’s currencies correspondent, reported on Friday, and the move has fuelled speculation that countries are set to engage in a bout of competitive devaluation.
The SNB’s move came after the value of the Swiss franc soared in recent weeks as investors sought refuge from recent market turmoil. Last October, after the collapse of Lehman Brothers, it rose to a record high of around SFr1.43 against the euro, a level it has come close to again in recent weeks.
But it fell to its lowest level this year on Thursday after the SNB said the currency’s strength represented an “inappropriate tightening of monetary conditions” as it battled against a slowdown in the Swiss economy. “In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro”, it said.
The SNB also cut its interest rates by 25bp, taking its three-month libor target range down to 0 per cent to 0.75 per cent, and announced plans to adopt a quantitative easing approach to monetary policy.
What’s interesting, as the FT’s John Authers noted in his Short View column on Friday, was the speed with which the Swiss franc responded, dropping 3 per cent against the euro in a matter of minutes, which “shows that if a central bank wants its currency to fall, it can deliver”.
The problem, as Authers notes, is that “not everyone can devalue at once – someone has to be left with an overvalued currency”. However, in this case, the Swiss move has more to do with attacking deflation than with boosting Swiss trade – as the SNB also cut rates and said it would buy bonds. The Swiss franc did have a “perverse gain” last year, as it stood out amidst the financial turmoil as a safe haven currency, and a round of devaluation may not necessarily be the outcome, adds Authers.
In the view of CBA’s chief currency strategist Richard Grace, the aim of Switzerland’s currency intervention appears to be two-fold:
First, to offset downward import price pressure (and the risk of deflation) associated with the appreciation in CHF/EUR to near-record highs. And second, to gain a competitive depreciation to help stimulate exports to the eurozone, given the eurozone accounts for 63% of Swiss exports and exports account for 57% of Switzerland’s economy.
The SNB’s intervention to sell CHF and buy EUR is also likely to weaken the Swiss TWI, he adds, “despite this not being a stated objective of the SNB”. The upshot in terms of cross trades with other high-yielding currencies such as the New Zealand and Australian dollars, would imply some downward pressure as the Swiss TWI moves lower, argues Grace:
The NZD/CHF exchange rate reached a record low of 0.5701 on Tuesday 10 March. Both the NZD/CHF and the AUD/CHF exchange rates are leading indicators of risk appetite and the global economy. In the past the NZD/CHF has tended to peak (and sometimes bottom) before the AUD/CHF exchange rate. However, given the New Zealand economy has been in recession for the last 4 quarters (and the Australian economy has yet to record a technical recession), the AUD/CHF exchange rate is likely to lead the NZD/CHF in the appreciation cycle. The AUD/CHF exchange rate hit a low of 0.6935 on 27 October (the same day AUD/USD hit a low of 0.6009) and has moved more than 12% higher since.
Being sure of a definite catalyst to trigger the NZD/CHF appreciation cycle is difficult, but a few developments occurred this week to provide enough confidence that a long-term buy position in NZD/CHF is worth undertaking on a three-year view, with an appropriate stop more than 2 cents below the historical low.
Related links:
Swiss franc intervention – Short View
Swiss stoke fears of currency wars - FT
On your marks, get set, devalue – FT Alphaville