Zurich Turns The Euro Into Swiss Cheese

But What will Happen to Switzerland?

Econintersect:  The Swiss National Bank shocked financial markets on Thursday by scrapping a three-year-old cap on the franc, sending the currency soaring against the euro. Reuters said "stocks were plunging on fears for the export-reliant Swiss economy. Michael Haltman at GEI News (Switzerland Goes Further into Never-Never Land) had quotes from Clare O'Dea at SWI describing in detail how manufacturing, exporting and tourism in Switzerland would be hurt, but also pointing out that retail prices for the many imported products in Switzerland would be coming down.


Trade Summary for Switzerland

The Swiss have a relatively small balance of trade compared to the U.S., Germany and China, with latest data showing a trade surplus of nearly 4 CHF billion for the last month reported, November 2014.  This had been driven up from the 5-year average around 2 CHF billion by the weakening euro and the franc peg to that currency.  The trade surplus for Switzerland at 2 billion CHF is (+) 0.4% of total trade value (exports plus imports).  The corresponding number for the U.S. is (-) 9-10% and for Germany about (+) 10%.


The countries that Switzerland trades with and the products traded are shown in the following graphics.  Go to their source, The Observatory of Economic Complexityfor interactive graphics that show the data behind every tile by pointing with your cursor.








With the change of the exchange rate for CHF to the U.S. dollar changing by 15% (1.02 CHF for 1 $ to 0.87 CHF, the cost of Switzerland's most recent annual oil and petroleum products imports which cost about 13.76 CHF billion would have been a little less than 12 CHK billion.  So there are some positives in the revaluation impacting the balance of trade.

Shaking up Forex

Primary effects (exchange with the Swiss franc) were generally large.  Some examples:  The U.S. dollar dropped about 15% against the franc, the euro about 16.7% and the yen about 12%.  Rates have bounced around after the initial reaction as shown in the following  charts.


The euro was originally down to $1.158 (-1.75%) has since come back to 1.1627 (-1.32%).  Both percentages are vs. the early am high of the day (15 January) at 1.1782.

A different kind of  uncertainty is seen in the USDCHF chart where a "flash crash" of 25% occurred right after the announcement but then the exchange trading quickly quieted down, although it was still much more volatile than before the revaluation announcement from Zurich.


Bottom Line

There will be some fallout but, except for traders going on heightened nerve alert for another currency market bombshell (like a Grexit - Greece exit from the euro - or a move to more freely floating Chinese yuan renminbi), the adjustments in the markets in general will probably be less traumatic than many were speculating several hours ago.  If the balance of trade were to go negative it would require that the fiscal balance that Switzerland has had at zero (neither deficit nor surplus) for the past two years would be forced into deficit to avoid a private sector monetary contraction.  (See Sectoral Balances.)  But it is not clear that a negative balance of trade will actually occur.  We'll have to wait and see.

The Swiss Stock Exchange SMI Index declined 8.7% in the local currency, but that was an advance of more than 6% in U.S. dollar terms.  The intitial reaction must be considered positive.  If this price level holds for a few days the assessment must be that investors are endorsing the revaluation and are not expecting serious impacts on the Swiss economy.

The immediate reaction of the Swiss ETF (NYSE:EWL) was an advance of over 3% which was where EWL closed at the end of the day.  A reflex reaction that then holds at the end of a full day is likely an advance that can be trusted.  Relative strength for EWL will probably be positive in coming weeks because it should close with the SMI Index to some degree.

After a day with a lot of excitement maybe not so much has happened except maybe a period of outperformance for the Swiss market ETF.

For further explanation, read MacBeth Act 5, Scene 5, page 2.

If you prefer to read those who see much more in this than I do read:


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John Lounsbury 9 years ago Contributor's comment

I have updated the original article to include the comments below. econintersect.com/.../zurich-turns-euro-into-swiss-cheese

Dick Kaplan 9 years ago Member's comment

Great read, thanks.

John Lounsbury 9 years ago Contributor's comment

Thanks for you comments, Moon and Jack.

@Wall Street Jack: You point out a significant omission from my article - I discussed only macro issues and did not mention the micro turmoil as several broker firms in the forex space were wiped out because they were not hedged against the vicious swing in the Swiss franc and related large ripples in other currencies.

I am seeing lots of articles, from bloggers, financial pros and academics warning of potential for major economic damage from this action. It has been compared to the Lehman collapse and the Nixon killing of the remnants of the gold standard. I don't see that type of contagion. You can (and I know Moon will) point out my foolishness if I turn out to be wrong in this assessment. :-)

Moon Kil Woong 9 years ago Contributor's comment

LOL the Swiss didn't turn the Euro into Swiss Cheese. The Euro nations did and the Swiss just decided not to join the bloodletting and thus called it for what it is, rubbish. The Euro is weak enough as is. If you add QE problems to it then you are talking about a currency with Socialist bankruptcy problems and mixing it with Japan style accounting games going on as well. Thus you will have a failing economy with bankrupt parts and combining it with QE stagnation that kills growth. It's like mixing a zombie with a disease that causes suicidal insanity and disables growth and self preservation. There is no hope of escaping such a state and the Swiss are right, get as far away as possible.

Wall Street Jack 9 years ago Member's comment

One of the biggest one day FX moves ever. Insane. A lot of people just went broke.