by SignalFactory · January 27, 2020 | 09:13:18 UTC
The
Swiss Franc’s popularity problem looks set to haunt the Swiss National Bank
well into 2020 and probably beyond.
Perhaps
no other central bank exemplifies quite so well the doleful transition of that
profession from the rock stars of the Alan Greenspan era to their post-crisis
role as gloomy pickers of least-bad options.
The
SNB’s festive choice is particularly stark. It can try to engineer a lower
Franc, risk the currency-manipulation wrath of the US and hurt domestic savers.
Or it can let the currency rise and throw both local exporters and any chance
of inflation on the fire.
Why?
Well in at atmosphere of trade tension, Brexit, Presidential impeachment and
slowing global growth, investors can’t be blamed for wanting a lifeboat. The
Swiss Franc is usually it. Even with some of the lowest interest rates in the
world, the currency has strengthened consistently against the Euro.
Of
course, last time this happened the SNB took drastic action. In 2011 it stunned
markets by putting all its mighty firepower behind the defense of a EUR/CHF
floor. It said that any forays below EUR1.20 would be punished. And how. That
resolve held until 2015 when the European Central Bank’s nuclear Quantitative
Easing forced it to abandon the defense.
A
US Treasury report released in May put Switzerland as number twelve on a list
of currency manipulators, even though it was removed from a list of urgently
monitored countries. It won’t want to go back on.
However,
that doesn’t mean it lacks options. SNB Chairman Thomas Jordan said in a
newspaper interview this week that further interest rate cuts can’t be ruled
out, even if they are not imminent. The SNB’s key policy rate has been steady
at minus 0.75% for five years.
Of
course, if rates that low for that long aren’t enough to scare away investors,
it must be debatable whether any likely cuts would, especially if trade
tensions between the US and EU worsen appreciably. They might. The chronic US
trade deficit with Europe is increasingly in Washington’s sights with higher tariff
barriers threatened.
But
lower rates, or the threat of them, maybe all the SNB has. On past evidence,
they won’t be very effective. The Swiss Franc is likely to remain terribly
popular, at least until trade tensions ease.
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