Swiss exports benefit from franc’s dip

The Swiss franc, long a refuge for crisis-wary investors, has now fallen to its lowest level against the euro in 20 months amid a rosier outlook for the European common currency.

Swiss exports benefit from franc's dip
Photo: The Local

Early on Friday, more than 1.25 Swiss francs were needed to buy one euro, placing the Swiss currency at its lowest level since May 2011 and offering the prospect of some much-needed relief for Swiss exports.
"There are less concerns that the euro will break up and equities markets are getting stronger," Credit Suisse analyst Marcus Hettinger said to explain why investors appeared to dump the "safe-haven" Swiss currency and edge back towards the euro.
"Investors are leaving assets where they get no yield, which is the case of the Swiss franc," he told AFP.
The Swiss currency has in fact been steadily weakening against the euro since European Central Bank chief Mario Draghi on January 10th described "a significant improvement in financial market conditions" in the eurozone.
This is not only good news for the struggling common currency area, but also for the Swiss economy, according to Zuricher Kantonalbank analyst David Marmet.
"For the export-orientated sectors it means that they will fare better than before," he told AFP.
It was to protect Switzerland's exports that the country's central bank, or SNB, in September 2011 imposed an exchange rate floor of 1.20 francs for a euro — a floor it has worked very hard and spent a lot of money on currency purchases to maintain.
The SNB introduced the floor as fears of an imminent euro implosion coupled with concerns about soaring US debt levels and pushed investors to seek cover
in the safe Swiss franc.
While the Swiss economy has remained a rare bright spot on the European map, the swelling value of the franc has created headaches for the central
bank and exporters, which have seen their margins eroded by unfavourable exchange rates.
At home, the overvalued currency has heavily penalised Switzerland's important tourism sector, as more and more vacationers opted for less expensive destinations.
On Friday, the Unia trade union highlighted the price the Swiss hotel industry had paid for the strong franc, and called on the central bank to take advantage of its recent weakening to raise the exchange rate floor.
SNB "should immediately set the floor at 1.25 francs, and in the mid-term, the central bank should continue to aim for a reasonable exchange rate of 1.40 (francs) for a euro," it said in a statement.
Others have begun hinting that the weakening Swiss franc could clear the way for the floor to be ripped up altogether.
Gregoire Bordier, the head of the Geneva's Private Bankers association, told reporters in Bern Thursday that he expected the central bank to bury its exchange rate floor by the end of the year.
But analysts said the central bank was unlikely to change its monetary policy any time soon.
"At the moment, there is no reason for the SNB to drop the floor," Marmet said, pointing out that doing so would be an invitation for markets to test the new policy.

Raising the floor was also probably not on the table, he said, pointing out that "because the Swiss economy is doing quite well, it would be perceived as
a form of currency war".
Hettinger agreed.
While the central bank will have to change its monetary policy eventually, he stressed that "our economists don't expect this to happen anytime soon".
Hettinger said that even at 1.25 the Swiss franc was still clearly overvalued.

If sentiment towards the euro continues to improve, he said the Swiss currency could move closer to what he deems a fairer value: 1.35 francs for a euro.

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


Why is the demand for 1,000-franc banknotes growing in Switzerland?

Large-denomination banknotes, like the 1,000-franc note, are rarely used for everyday transactions in Switzerland. So why are they becoming more popular?

Why is the demand for 1,000-franc banknotes growing in Switzerland?
The kind of banknotes the Swiss like to stash away. Photo by AFP

The demand for 1,000-franc notes has risen in the past months, data from the Swiss National Bank (SNB) indicates.

CHF1,000 converts to approximately €925.75, £824,63 or $US1126.98. 

Whether withdrawing the money from an ATM machine or directly from a bank, customers request large-bill denominations more often than before.

“We do know there is more cash being currently withdrawn in large notes, but it changes hands less often” Sarah Lein, a monetary policy expert from the University of Basel told SRF public broadcaster.

This means the money is not being spent but stashed away.

“We can conclude that some large notes end up in a safe”, she added.

READ MORE: Switzerland’s economy forecast to recover 'from summer onwards' 

The reason, she said, is that many banks charge their customers negative interests on large deposits.

“Therefore, it could be cheaper to simply withdraw the cash in large notes and keep it in a safe, especially since inflation has been extremely low for a long time”, Lein added.

This is not unusual — in times of crisis, more cash is often in demand.

But could this cause the shortage of 1,000-franc bills?

That is not likely to happen, Lein pointed out.

“Both the central and commercial banks have enough cash stored in their vaults to meet such demand. So there is always enough money available”, she said.

There is about 48.6 billion francs floating around in the form of 1,000-franc notes, constituting 59 percent of all Swiss notes in circulation. 

It is the world’s second-largest denomination after Brunei's B$10,000 note.

READ MORE: What do people in Switzerland spend their money on?