London, 15 January 2015. Paul Marson, chief investment officer of MONOGRAM, comments on the Swiss central bank’s surprise announcement that it has abandoned its currency peg with the euro:-
“Today’s announcement is puzzling. Switzerland’s economic situation isn’t that different from September 11, when the peg was bought in to stave off deflation. Core inflation is 0.3% today, and was 0.2% in 2011. Arguably there may be greater demand for Swiss francs from capital flight from Russia, but such a currency rise will have a big impact on Swiss growth and inflation and on company earnings [Swiss companies will largely not have hedged currency exposure, in expectation of a continuing cap].
“With imports 52% of GDP and exports 66% of GDP, the currency really matters in Switzerland – and this will really damage Swiss exporters. Import prices will weaken, once again raising the spectre of deflation and growth is likely to weaken: the very same concerns that the Swiss National Bank [“SNB”] raised in 2011 would appear to apply today.
“Maybe the SNB knows something we don’t? One explanation is the possibility of euro QE on a greater than anticipated scale, perhaps the SNB decided not to fight the ECB and is unwilling to see a further substantial balance sheet expansion [and suffer the practical difficulties that coincide with the eventual unwinding of those positions]? Perhaps ECB quantitative easing has forced the SNB to throw in the towel after a CHF 307 bn [398%] increase in the monetary base since mid-2011? After all that balance sheet expansion, the CHF is stronger, growth little better and deflation risks almost identical: one has to wonder, was it worth it?”
Swiss Franc/ Euro Exchange rate