While Switzerland’s exports are relatively insulated from currency fluctuations, and less sensitive to real exchange rates, any recession in Switzerland’s main export markets would inevitably impact the Swiss economy. Moreover, the country’s trade surplus in goods has continued to grow. Since 2009, Switzerland has managed to increase its share in global goods trade from 1.4% to nearly 1.7%. Overall, we expect Swiss industries to be able to mitigate the impact of the exchange rate on their exports and pass on higher costs to customers. High value goods such as luxury watches and pharmaceuticals are especially unaffected by the strong franc, while sectors including industrial machinery and chemicals find it more difficult to remain competitive. That has also allowed many sectors to charge a premium for their exports. Switzerland’s corporations have had decades to adjust to a strong currency, and high costs, through innovation and efficiency improvements. In 2021, the central bank posted a net profit of CHF106bn, and distributed a dividend to cantons and the Federation worth CHF6bn. Historically, the SNB has recorded unrealised gains and losses from its positions in response to changing currency markets. For the first half of 2022, the SNB reported an accounting loss of CHF 95.2 billion, the equivalent of just over 8% of the balance sheet. With rising interest rates in 2022, the central bank is making mark-to-market losses in their bond investments. This said, if the Swiss franc appreciates, then foreign currency investments’ value in francs fall. The SNB’s portfolio can record mark-to-market losses depending on market performance, and so the main risk is higher interest rates for bonds and stock market declines. Of these total assets, around 90% are in the form of foreign currency investments, mostly denominated in US dollars and euros, with 75% invested in bonds and 25% in equities. That is the highest proportion of any major central bank. Total assets at 30 June 2022 were CHF990bn, or about 140% of Switzerland’s gross domestic product (GDP). The SNB’s openness to selling foreign-denominated investments to buy the Swiss franc would have the benefit of helping to reduce the central bank’s balance sheet, while adding to the appreciation pressures on the franc. However, when adjusted for inflation, it is about 12% weaker, and explains why the SNB can now afford to let the currency strengthen. Compared with the highest euro-franc rates of early 2015 when the SNB abandoned its floor against the euro, or during the 2011 eurozone debt crisis, the Swiss currency has appreciated as much as 9% in nominal terms. Still, while the franc has strengthened in nominal terms, it has not done so in real, inflation-adjusted terms. More recently, the franc has strengthened in response to the eurozone’s slowing economies, geopolitical exposure to the war in Ukraine and in particular, rapidly rising energy prices. Currency movements are by definition relative changes, and the franc has appreciated in response to demand from investors for a haven currency. In nominal terms, the franc gained 40% against the euro since the common currency’s inception in 1999, and more than 30% against the US dollar over the same period. The Swiss currency’s strength is not a story of a year or two but long-term appreciation. This means that the exchange rate is a large component of Swiss inflation. While that is less than half the 7.5% rise recorded in Germany in the same month, some of that is trickling into Switzerland’s small, open economy as it imports more expensive goods, including crude oil, and services from its neighbours. Inflation in Switzerland increased 3.4% in July compared with a year earlier. SNB President Thomas Jordan said that policymakers have not ruled out interventions “in both directions so that we can buy or sell foreign currency if necessary.” This is a significant change for a central bank that has been selling the Swiss franc for much of the last 14 years.Ī strong currency is a logical response to keeping imports as cheap as possible and containing consumer prices. The 50 basis-point hike was its first rate rise since 2007. In response to prospect of higher interest rates in the eurozone, on 16 June the SNB increased its own rates.
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