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Why a central bank hates a safe haven – Exchange rates simply explained

Nice video to explain the Economic Crisis and the Exchange rates (also known as FX rates) evolution from a Swiss perspective.

Source: Swissinfo.ch

Let’s have a look at the CHF-EURO exchange rate:

CHF-EURO

Source www.xe.com

It is rather clear that the quantity of money that EURO and USD brought in Switzerland is enormous and pushed the currency upwards. Swiss National Bank put a fixed exchange rate against Euro at 1.20 to sustain economy against the pressure of foreign capitals going there.  Swiss National bank also put the negative interest rate to de-incentivize additional capitals coming. It is interesting to see that, even in te linked article, there was agreement on the sustainability for SNB of the floor of 1.20.  Nevertheless they did not succeeded under the pressure of the enormous quantity of money coming. The free trade at 1.10 now is creating struggles to Swiss Economy as the majority of the export is towards Euro zone. Pressure to Swiss Economy is enormous, just because Euro economy is so weak and Euro owners want to escape from there.

But.. what happened against USD $?

CHF-USD

 

Still the evolution is similar but less strong. Also the decision to re-establish the free trade of the FX rates allowed CHF to return to a value similar to April 2014. This increase provides some relief to the exports in USD.

Now Switzerland faces the same problem that USD faced in 2009 and Euro in 2014. Both US and EU reacted to the economic crisis with a devaluation of their currency to re-establish competitiveness of their own Enterprises in the global market.

The questions Switzerland is facing now are:

  1. Is Switzerland going to face a crisis similar to the one in Euro zone?
  2. Is the devaluation of CHF the only way to get out?
  3. If Devaluation is the only way, how it can be accomplished if all the rest of the world continues buying CHF as they are more trust-able than EUR or USD?

These questions are bringing a very new and difficult situation for Swiss politics and SCB:

http://www.swissinfo.ch/eng/on-the-record_snb-outlines-life-without-franc-euro-peg/41334872

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