by SignalFactory · December 11, 2019 | 09:32:47 UTC
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.
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