The announcement of the Swiss National Bank (SNB) to abandon the fixed exchange rate between euro and franc, has had a dramatic effect on markets, with the exchange rate plummeting from 1.2009 to 0.9755, the Swiss shares closed at -9%. The yield on 10 year Swiss bonds has turned negative. How did investors respond to the surprise move?
Andrew Parry, Chief Executive Officer, Hermes Sourcecap, comments: “Today’s move by the Swiss National Bank was unexpected by everyone. We had commented in our latest outlook on the signal the SNB had been sending about the world by trying to drive down its exchange rate, as this is far from “normal” behaviour for the Swiss, but we had not anticipated they would abandon this policy with such alacrity.”
Christina Böck, CIO Switzerland and head of solution strategies Central Europe at AXA IM argues: “This is likely to have very negative implications for the Swiss economy, it could drag it into stagnation and endanger the country’s fight against deflation. The SNB may have to enact further policy loosening and ad hoc currency intervention over the coming year.”
Has the decision been partly motivated by the growing appreciation of the dollar, as SNB president Jordan suggests? Eric Chaney, head of Research and Investment Strategy team and David Page, senior economist at AXA IM argue: “We think that the SNB considers that the downside risk to EUR/USD is significant, with the possibility of parity reached before year end. This would have damaged the attractiveness of Switzerland as a financial safe haven for savers from the wider dollar zone, had the CHF/EUR peg been upheld. By removing the floor, the SNB re-establishes the CHF as a hedge against FX risks for overseas savers even if it comes at a hefty, but known, price, in the form of negative deposit rates.”
Böck adds: The SNB mentions “increased divergences between monetary policies of the major currency areas” – this hints to the expected impending ECB QE programme. In other words, the SNB is considering that, while a large depreciation of the EUR against the USD might be in the interest of euro area economies, a large depreciation of the CHF would be at odds with one of the basic comparative advantage of the Swiss economy, namely its special and historical financial safe haven status.”
QE expectations rise:
Although Thomas Jordan refused to comment on possible cooperation with the ECB, most investors are convinced that it takes two to tango, they interpret the SNB move as a confirmation that the ECB will initiae sovereign bond purchases as of next week.
Anthony Doyle, Director & Head of Fixed Income Investment Specialists at M&G Investments, comments: “According to SNB President Thomas Jordan, the move was reflecting the fact that CHF had depreciated against the US dollar since the introduction of the exchange rate floor in 2011 so that upholding it was unjustified. We believe, however, that the move was largely motivated by the outlook for ECB quantitative easing, possibly to be announced as early as next week, that could exert further upward pressure on CHF and make it even harder for the SNB to stick to the fixed exchange rate floor”
Long term implications:
Despite the immediately negative effect on Swiss shares and Swiss 10 year bond yields going negative for the first time, Markus Fuchs, managing director at industry association SFAMA argues that the long term outlook for the Swiss asset management industry remains solid:“ The impact of a strong franc will be limited for investors, because they can decide independently whether to conduct investments denominated in Swiss francs or another currency.
“Of course each country has its own problems, but taking into account the combination of low unemployment and high wages, I am confident that Switzerland is well positioned to remain a safe haven.” Fuchs adds: “The impact of a possible appreciation on equity markets has also been limited partly because the absolute size of the Swiss equity market is relatively small” he adds.
Thomas Liebi, chief economist at Swisscanto, tends to agree: “The impact of negative deposit rates will initially remain limited, due to the relatively high exemption threshold and the market-disrupting surprise to abandon the peg against the Euro. Longer term the SNB hopes to weaken the Swiss franc’s attractiveness with the negative deposit rates. Because interest rates allow theoretically unlimited space for further downwards adjustment, the SNB has the means to weaken the CHF further if necessary and desirable. But in case of outright market panic even substantial negative rates will not deter investors from buying the Swiss franc as a safe haven.
However, Christina Böck,warns: “The SNB’s move certainly lowers the general level of returns in all asset classes – but it increases the relative attractiveness of real assets like equities (Swiss and foreign) and real estate which have a new potential to appreciate now in light of this new factor. Hence, clearly pension funds should stay invested in those areas and even increase their allocation to Global equities in an important fashion. But at the same time, the should think about hedging strategies in order to be able to keep those allocations in case of increasing volatility.”