The historically ‘neutral’ Switzerland, a safe haven for large capital, is now a victim of the worldwide currency war. While almost every central bank across the globe is trying to devalue its currency, the opposite happened to the Swiss franc (CHF) as the franc increased by 30% in value versus the euro, with an intraday jump of no less than 50%!
There is no longer a cap on the Swiss franc. Since the crisis of 2008-2011, the franc has been rising in value versus the euro, and the euro crisis of 2010-2011 created additional pressure for the franc. This was a smack in the face of the Swiss central bank, which decided to put a cap on the CHF on September 6th in 2011 after the Swiss franc had risen by 60% to 1.04 versus the euro and the negative impact of the much stronger currency became very tough on Swiss exporters. The franc would not move beyond 1.20 versus the euro.
If a central bank wants to devalue its currency, the strategy is quite simple: print money and use that money to buy foreign currency. This blew up the balance sheet of the SNB (Swiss National Bank) to no less than 85% of the GDP, without any inflationary pressure. The policy of the SNB created political pressure as well, since it was the opposition that pushed to organize a referendum to force the SNB to keep 20% of its balance sheet in gold. Although the motion was denied in November, the damage had been done, because the SNB was no longer able to defend its policy. It is expected, moreover, that the ECB will announce a program to purchase 550 billion euros worth of government debt this Thursday. No less than 93% of the economists surveyed by Bloomberg expect this to happen. This will most likely lead to enormous inflows for Switzerland as investors will look for safe havens, which would add hundreds of billions to the SNB’s balance sheet on top of everything.
Source: WSJ, SNB
If the SNB would not have decoupled the CHF from the EUR, it would have become more dependent on the policy of the ECB and the bank must have seen an opportunity to get out right before the ECB’s QE program. You could ask yourself, by the way, whether there is not some big hedge fund hiding behind the SNB’s balance sheet. They practically bought everything: euros, euro investments, bonds , small caps, etc. You name it. This means that there is a lot of leverage in the system, and that it is intimately interwoven with the international banking system, which is what makes the SNB exceptionally vulnerable today.
