The ECB’s short-term rate (the interest rate on the main refinancing operations) is 0.00%, whereas the Swiss counterpart (the SNB policy rate) is negative at -0.75%. The ‘delta’, or difference, is therefore simply +0.75% (i.e., 0.00% minus -0.75%, a double-negative, which is positive +0.75%). With the ECB rate remaining at 0.00% since March 10, 2016, and the Swiss rate remaining at -0.75% since January 15, 2015, it would seem that the EUR/CHF should enjoy some level of stability going forward.
However, with U.S.-China trade relations still uncertain, and with the potential for trade wars to (or continue to) spill into Europe (for example, U.S. President Donald Trump previously stated that “[Europe] treats us [the United States] worse than China”), the ECB may struggle to justify lowering rates (much) further.
This is because lower rates tend to weaken a country’s currency (since it becomes costlier to hold the currency in question, relative to other currencies, and provides an incentive for carrying trades). If the ECB is viewed as trying to manipulate their currency lower (with even lower rates), in particular in relation to the U.S. dollar, this could risk ratcheting up global trade tensions between Europe and the United States.
Switzerland, on the other hand, is a far smaller country than the European Union as a collective. The country’s annual gross domestic product in 2018 was about $706 billion, representing about 1.14% of the global economy. The eurozone, meanwhile, generated $13,670 billion (about 22.05% of the world economy).
The smaller size of Switzerland, relative to broader Europe collectively, could mean that it effectively has more bargaining power; it can lower rates (and therefore likely devalue its currency) with a far lower risk of U.S. backlash. This would weaken the global price of goods and services provided by the Swiss. And per 2017 numbers, Switzerland’s main export partners were Germany and the United States (representing 15.2% and 12.3% of their exports, respectively).
Data from the World Bank show that Switzerland’s trade balance with Germany is deeply negative (to the tune of about $8.3 billion), although there is already a positive trade surplus with the U.S., and the country’s overall trade balance was positive with $12 billion in net exports.
EUR/CHF LONG (Buy)
ENTER AT: 1.09150