Why is Suisse Franc amongst the most expensive currencies?
Switzerland has a curse. It is one of the most expensive countries in the world. And the pressure to ease its exporters pain does not seem to ease. Why is it so, what are the historical reasons behind it and what are the consequences of it? This article examines Switzerland Swiss Franc (FIAT currency) position only.
Switzerland is a small country in the middle of Europe with a population of approx. 8,4 Million. Apart from its mountains, Switzerland is known for their Swiss watches (Rolex, Philip Patek ) as well as for their chocolate (Toblerone, Milka).
As world wars ravaged Europe, Switzerland managed to remain mostly untouched, safeguarding their position as neutral bankers. Indeed, Switzerland has been known historically to be the one of the central hubs of the global financial system. This does not apply only for the century old traditional banks and financial institutions, as Switzerland has seen fair share of ICO’s and modern Cryptocurrency investors and companies emerging there.
Near history snapshot
Depending on where you prefer to start analyzing (16th century?) you can find out that Switzerland has been a financial hub and safe haven for first European and then later global investors with its bank secrecy.
Here we chose to start observing from 2005 forwards that was close to the great value rise causing mass shockwave through the Swiss economy. Indeed, over the past 15 years the value has just kept on rising against both the Euro and the US Dollar. Activities in these economic zones and currency policies have direct impact to Switzerland, as we will witness here below.
Graph: Historical money-making moments
In January 2015, Swiss Central bank stopped defending the currency and let it float. The results were an immediate hike of 30% against the Euro and 25 % against the US Dollar. The rapid change was so dramatic that it made some foreign exchange brokers go bankrupt. Furthermore, hedge funds made gigantic losses and the stock exchange collapsed.
How come? Suddenly foreign investors could not buy as much as before, many acquisitions were financed by loans that got messed up and suddenly everything became too pricey. If that sounds like financial gamble and too far away from the real economy, that was certainly not the case.
Financial markets versus the real economy
Most of the visitors that come to Switzerland come for leisure, not for business. As a response to that change, the tourism industry saw laser cuts. If the holiday package had 1000 USD cost yesterday, now it was overnight 1250 USD. This limited radically the number of tourists who could afford to travel in Switzerland, when nearby France, Italy and Austria ski resorts were offering quite much the same experience with more affordable price range.
Likewise, the export sector got hit hard almost from every angle, as approx. 60% of Switzerland’s exports are to the Euro zone, and approx. 20% to Germany alone. One could easily understand commodities suffering, such as chemicals, but even high-end value-added sectors such as Pharmaceutical, electronics and precision instruments experienced the strong negative impact.
The pressure of the expensive currency has forced Swiss companies to become specialized and niche them even further. No wonder that the country is full of luxury brand manufacturers of different kinds. Only the ultra-wealthy can afford to shop for those and as the world sees economic inequality increasing with polarization, Switzerland has become the destination for the both Bling Bling and discrete luxury for the rich of the world.
While high valued currency translates into naturally cheaper imports, it impacts national inflation rates. That does not help much, if the people risk facing mass unemployment due to the export industries inability to deliver. Of course, for those who did manage to keep their jobs, weekend holidays and even longer vacations abroad become suddenly easier to take and the rest of the world appears affordable.
Why do the Swiss fear the Euro?
Earlier currency valuation shock led to interesting side effects. For example, cross border trade was booming as the Swiss living close to the borders went to do their shopping in the eurozone. Also the companies were trying to pay those employees who commuted into Switzerland from the Euro zone to pay their salaries in Euros instead of Swiss Francs. Some even pushed their foreign contractors and vendors to accept payments in Euros and other currencies than in Swiss Francs.
As so much trade is done with European Union, the changes in European economy shakes Swiss economy as well. Good historical examples were for example Greek crisis when the market was doubting if Greece would leave the EU. It created waves of volatility decreasing the value of Euro.
In other economies such as Norway or Russia, major dependency items would hurt, such as oil. But when the Swiss Franc went up again the opposite is true. The investors are looking for a safe haven, and suddenly Swiss franc feels a better choice than Euro.
Not rough enough? Try Trump!
When Donald Trump became the President of the United States he decided to make what he had promised. After that the stability of the global economy has never been the same and daily traders must be happy.
One of the things Trump had promised was to address the trade imbalance between China and the USA. What was less noticed by the global press, was that the Trump administration went after all countries in the world that had significant profit from their exports towards the USA. Switzerland’s export triumph became a target.
The US Treasury department lifted Switzerland up to their watch list as at certain point the current account surplus was equal to 10.7% of GDP towards the USA. The Americans took this as a sign of currency manipulation. As a consequence, the Swiss Central bank had to calm down their efforts to hold the value of Swiss franc low, and it started to rise again. Arguments that the central bank interventions were necessary for the national price stability was something that the USA officials could not less care about.
What to do?
Assume that everything would be well then, no un-sustainable Euro or Dollar pressure, economy rolling normally forward, would the Swiss franc then be let to peace? No, unfortunately the historically track record (for example year 2012) demonstrates that it also enforces the feeling of investors to think that it is safe to invest in Swiss Franc. Causing the value to go up again.
What can the Swiss do then? Their central bank has tried ceilings, pegging and other ways to control and buy currencies to stabilize the situation. But those rarely last. 2015 January 15th ease of such policy caused the mentioned Swiss Franc hike of 30% with disastrous consequences.
Another trick in the central bank arsenal has been to provide negative interest rates. In other words, charging foreign central banks for having francs on deposit in Switzerland as a way of discouraging them from even trying it. Yet, many investors are ready to pay that pain, in order to have their money safe.
Only “survivors” were the companies that had niche export orientation and manufacturing or raw material imports from cheaper currency countries. Bulk cannot compete. High value brands and specialized high-end products have it easier as long as their cost structure is in order. These are the places where it might be interesting to look for jobs, customers or investment opportunities for future returns.
The Swiss paradox
The instability of the Euro debt crisis (most of the Southern European large EU countries have alarming national and debt levels) is having an impact on the Swiss economy too. Export-oriented industries are particularly affected because the strong Swiss franc has reduced their ability to compete in terms of price and their customer countries purchase power that has been cut with all their debt.
In addition to all debts and political turmoil in Europe, the Swiss could not escape the Global Corona impact either that weakens the whole global demand for their products and services. Main partners from the rest of Europe are not buying as much as they used to, but neither do others. The Swiss enjoy a stark currency and a shrinking customer base at the same time. As a result, the economy is expected to go down, while currency goes up.
The picture is very complex and it would be wrong that everything is due to Corona and Safe haven seeking of global investors. In the bigger picture, strong Swiss Franc is also due to the fact that as long as the EU overall inflation is higher than inflation inside Switzerland, there is a reason to expect higher valued currency.
Secondly, in less dramatic times, Switzerland had a strong and varied export sector causing surplus to the National balance account, which again is a valid reason for highly valued currency.
Finally, have you ever heard a riot from Switzerland? Compare that to France or high debt Southern Europe. Switzerland simply represents financial stability and that is what conservative investors love.
What does this mean for businesses and employees wanting to limit their exposure to risks? Get smart. Choose your future employer and customers wisely. It is better to operate in stable or growth sectors than with falling knives. Nevertheless, if you have the appetite for risk, many Swiss industries can provide lucrative opportunities with lower valuation at the moment from a variety of sectors.
As most consumers, employees and companies cannot bear the risk or support long term losses, Fyggex recommends you to do your own proper research to check which specialized Niche segment companies are least at risk before you make any investments in time or money.
Disclaimer: Fyggex, does not give any guidance, advice or recommendations to neither invest or not in any available cryptocurrency directly or indirectly via any trading platform, exchange or provider.Our sole purpose is to make you aware of the related real or potential risks and opportunities so that you can make your own research prior to any financial decisions you may want to take. Past performance is no guarantee for future financial returns.
Featured Image: moritz320