The Swiss franc reached a record against the euro on Tuesday — and that’s despite a recent pledge by the country’s central bank that it would help counter “excessive appreciation” in the currency.
What’s more, some traders think the Swiss National Bank is backing away from intervention in the franc altogether.
From the FT:
Investors believe that the recent improvement in the Swiss economy could prompt the SNB to step away from the currency market, in which it has been intervening since last March to stem the rise in the franc as part of its fight against deflation.
But there’s one other theory is doing the rounds to explain the SNB’s new-found passivity.
From RBC Capital Markets’ Sue Trinh:
With all the focus in the media on the possibility of China being named a manipulator . . . it is possible the SNB has let CHF go because Switzerland is more at risk of being named a manipulator than China in the 15 April 2010 report on International Exchange rate policy.
Switzerland-as-US-Treasury-labeled-currency-manipulator wouldn’t be too far-fetched.
As Trinh points out, there’s a precedent here. Up until mid-2007 the US Treasury published rankings of currency manipulator candidates alongside its semi-annual exchange rate reports.
The rankings were based on things such as current account balances, changes in FX reserves and effective exchange rates. The Treasury created three ranking systems, or ‘schemes’, with different weightings for different factors assigned to each one.
But in the last such rankings, in June 2007, Switzerland was at the top in all three schemes:
The footnote is important of course; for Switzerland was not designated a currency manipulator — and subsequently slapped with additional import tariffs — in 2007. As the Treasury noted then:
“The Swiss franc is an independent floating currency, and Swiss authorities have not intervened in the foreign exchange market. A marginal increase in Switzerland’s relative dependence of GDP growth on the external sector raised it to the highest bracket in this category. This was sufficient, in light of its already large and growing current account surpluses, to raise Switzerland to the top of all three schemes. Switzerland’s current account surplus reflects significant surpluses in trade in financial services and investment income.”
But clearly times have changed. The SNB has been intervening in the market since March 2009, sparking fears of competitive devaluation from the world’s central banks.
And, as Trinh notes:
Since mid 2007, movements in the key variables should leave Switzerland well ahead of China in the manipulator stakes based on the same framework. The main factor is the 107%y/y change in Switzerland’s FX reserves (China 23.0%y/y), which goes a long way to offset the fact that Switzerland’s C/A surplus has shrunk about 2.3%pt (as % of GDP) relative to China’s increase of about 7.3%pts. Note also the real effective exchange rate for CHF is up only 1% in the reference period while the real effective CNY has increased 4%.
Related links:
A misalignment primer – Econbrowser
Econo-spats, Stephen Roach v Paul Krugman edition – FT Alphaville
China as currency manipulator: reality check, please – FT Alphaville
The SNB can’t help intervening – FT Alphaville