I have analysed the daily movement in Usd/Chf and there has never been roughly an 8% Chf weakening in history since its free flotation in 1971. From Fig 2 of the July article, we can see that the Chf has, at maximum, weakened about 4.5% in a day, so this move is by far the largest.
The most important question to us, including the SNB and the ECB, will be if this peg is sustainable. I did some ‘back of an envelope’ calculations. If, for whatever reason, the Eur/Usd were to move in both directions by 15%, then the peg should be sustainable. The reason I say this is the primary FX pair, the Usd/Chf will have to move between 0.75 (a strong franc) to 1.0 (an ‘ok’ Franc). If the Euro were to collapse versus the Usd to, say 1.0 level then the Chf will have to be at 1.20 versus the Usd – again a level that is not unimaginable from the past valuations. However this might cause an unpleasant spike in the local Swiss inflation as commodity and factory input costs rise fast. But that is a problem for, one hopes a distant future, i.e. when the SNB are forced to raise interest rates.
For another clue I looked at the BIS trade weights that show Switzerland’s trading exposure against various countries (and currencies). I see that, from broad money measure, the Swiss Franc’s dealings with the Euro area between 1995-1997, was around 60% while being 10% with the Usd. The data I have only goes till 2007 and I can see that the trade weights have changed to: 55% Euro and 10% US. So it is fair to assume that the main bulk of Switzerland’s exposure is with its neighbour, the European Union.
My Conclusion:
• If the Euro were to collapse or depreciate versus the Usd, then interest rates in both the Eurozone and Switzerland, will have to rise. Hence, the effect on the Franc (i.e. its depreciation) should be somewhat mitigated.
• If the Euro were to rise (e.g. due to massive QE3 in the US), then Switzerland will have to cope with what it has in 2011 – i.e. a strong Franc (at least versus the Usd).
• With historic Euro-Chf correlation (although Euro’s short history means we have a limited comparison period) of around 85 to 90% it should be ‘ok’ for the SNB to keep an eye on the ex. Rate.
• No idea what happens if the Euro were to split in two.
• The only problem is that if the Euro rates were to rise, e.g. due to the debt crises, then the Swiss rates will have to artificially rise w.r.t US. What this might cause is Chf’s appreciation versus the Usd and a skew in the FX market. Such artificial rate rise might also lead to local problems in its (i.e. the Swiss) Economy.
Source | The Currency Forecasting Blog (CFB) | http://currency-forecasting.blogspot.com/2011/09/swiss-franc-first-thoughts-following.html
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