CHF: Manipulated currency? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that the SNB is unusual among major central banks insofar as it openly maintains currency intervention as a policy tool.

Key Quotes

“Despite its record January trade surplus, the CHF is on most academic measures extremely overvalued.  Perhaps partly because of pressure created by currency strength, Swiss industry fares well on measures of competitiveness.”

“In September the World Economic Forum named Switzerland as the world’s most competitive country for the eight consecutive year.  Switzerland’s achieved top marks for labour market efficiency, business sophistication, innovation and technological readiness.   Switzerland can also boast a current account surplus that reached 11.5% of GDP in 2015, a budget which is close to balance and low unemployment.”

“In addition there is a good level of liquidity in the CHF.  The strength of these fundamentals explain why the franc is a favoured safe haven currency.  The fact that Switzerland is outside of the EU has lent the CHF further support in periods of heightened uncertainly particularly in the EMU.  We would argue that the SNB’s long history of using policy in an attempt to offset currency inflows is as much a function of perceived risks elsewhere as it is a reflection of its solid fundamentals.”

“The underperformance of French government bonds in recent sessions is indicative of fears that France may not have a moderate President in place after the April/May elections.  The recent outperformance of German bunds is suggestive of flows moving into safe haven assets and is the type of flow which has previously lent the CHF support.”

“The JPY also has a well-established safe haven role.  In contrast to Switzerland, the President Trump has recently pointed the finger at Japan’s Ministry of Finance regarding currency intervention; even though this hasn’t taken place since the tsunami in 2011.  In the current environment, it is very unlikely that Japan will embark on currency intervention.  The SNB, however, maintain the right to do so.  The fact that the CHF is so overvalued and the smaller overall size of its economy have to date allowed the SNB to avoid drawing undue attention to its policy.”  

“There is some evidence that the SNB has been successful in diverting safe haven flow into the JPY.  In the aftermath of the plunge in Chinese stocks in mid-2015, CHF/JPY dropped lower and maintained this trend into the middle of last year.  The geographical proximity of France may make a repeat of this sell-off less likely this spring on any increase in perceived political risk concerning the French election.  However, we would favour selling rallies towards the CHF/JPY115 level assuming the SNB reasserts its interest in maintaining intervention as a currency tool next month.”