Swiss Lurk in Awkward Corner as G-20 Focuses on Currency GamingBy
Countries to reaffirm they’ll forgo competitive FX devaluation
SNB uses interventions to fend off haven flows into franc
Thomas Jordan could be forgiven if he finds himself a little ill-at-ease over the next couple of days.
Fresh from his latest threat to intervene in currency markets on Thursday, the Swiss National Bank president will now turn up in Baden-Baden to watch counterparts from countries many times the size of his pledging not to engage in competitive devaluations. Switzerland is an observer of the Group of 20, whose finance chiefs meet in the German spa town on Friday.
The SNB, which under Jordan’s stewardship infamously roiled markets in 2015 with an exchange-rate policy switch, has used interventions to stem a rise in the franc for the better part of a decade. Last year, that got the export-oriented country added to a U.S. watch list also featuring China and Germany. Unjustly, some would say.
“It would be very unfortunate to pick on Switzerland for doing something that’s not a deliberate policy to weaken the currency” but rather “a policy to offset the disadvantageous effects that result from international capital movements,” said Peter Dixon, an economist at Commzerbank AG in London. “Nothing would please the SNB more than not having to intervene.”
The U.S. has taken aim at Germany, China and Japan for allegedly gaming foreign-exchange markets. Treasury Secretary Steven Mnuchin, who is in Baden-Baden this week, has pledged to use a Treasury review in April to examine currency practices.
While euro-area officials have used asset purchases to combat weak inflation, Switzerland’s spate of falling prices has been chiefly due to the rallying currency, which is up 50 percent against the euro since early 2008.
The SNB -- which left policy unchanged on Thursday -- said that the franc is “still significantly overvalued.”
“The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing pressure on the currency,” it said.
The central bank took up interventions as the onset of the financial crisis led to an increase of flows into the franc, and accelerated the pace of its currency purchases amid mounting concerns about Greece’s debts. Its foreign-exchange reserves stood at 668 billion francs ($668 billion) at the end of last month, more than Switzerland’s annual economic output. While the SNB doesn’t typically comment on individual interventions, it publishes a yearly tally in its annual report, the 2016 version of which is due on March 23.
“When your reserves mount up the way Swiss reserves mount up, you’re under grave suspicion of trying to affect the currency,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup in New York. The fact that in Switzerland’s case the interventions were to combat capital inflows rather than to boost the current account is a “subtlety” that the U.S. Treasury “may miss.”
Domestically there have been concerns about the central bank overextending its balance sheet, though exporters’ profits are still under pressure. While Switzerland had a trade surplus with the U.S. last year, it ran a deficit with its top export partner, the euro area.
Also at the G-20 meeting is the International Monetary Fund. Its officials deemed Switzerland’s two-pillar policy of a negative deposit rate plus currency market interventions “appropriate” last year.
“Foreign exchange purchases are warranted to address Switzerland’s below-potential output, overvalued real effective exchange rate and sub-par inflation that is largely exchange rate driven,” said in a report published in December.
Ultimately, a better international economic environment and less anxiety among investors about matters ranging from elections in France to Brexit and U.S. President Donald Trump’s protectionist talk may allow the SNB to take its foot off the gas pedal on interventions.
“The Swiss franc is under constant appreciation pressure, and the only thing the SNB is doing is limiting that pressure -- it’s not at all about gaining market share on exports,” said Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich. “The interventions of the SNB are for returning to fair valuations, rather than away from it.”
— With assistance by David Goodman, Scott Hamilton, Jana Randow, and Craig Stirling