Switzerland under US currency microscope

The Swiss central bank's interest rate decision has taken on added significance now that currency policy is under American scrutiny. A key lesson from the Alpine country is that complexity is a better export weapon than a weak currency.

The US Treasury Department has found a new stick to stick between the spokes of international trade. At the end of last week, Switzerland was added to a list of countries whose currency policy is under scrutiny. In the United States, this is a sensitive subject. President Donald Trump would like to push the dollar as low as possible. If the value of the currency falls, American goods and services become somewhat cheaper abroad. In the meantime, Switzerland is proving that there is much more to a healthy export sector than a possible artificial tailwind from a low-valued currency.

Complexity as a key to success
A large part of the Alpine country's exports consists of pharmaceuticals, exclusive watches, chemicals and fine chocolate. The common denominator of these products is that they are quite difficult to produce. Switzerland therefore ranks first in the ranking of the Harvard Growth Lab, which measures the complexity of the export sector. More than half of the exports consist of high-tech products, while for the United States this is at most a quarter. Since the early 80s, the Swiss current account surplus has hovered around 4% of GDP. This is an impressive achievement considering that the country almost always has the wind against it on currency markets.

Now it hurts
The Swiss franc is the best performing currency over periods of 50, 25, 10 and 5 years. Since the turn of the year, the currency has risen 10% against the dollar. An important reason for this rise is the popularity of the franc as a safe haven in uncertain times. Slowly but surely, this currency strength is starting to hurt in economic terms. For example, the export of luxury watches fell by 3% last year. Last autumn, Rolex, Patek Philippe, Swatch and other companies called on the Swiss central bank (SNB) to put a brake on the rise of the franc. That has become a bit more difficult now that the country is under the currency microscope in the United States.

What does the SNB do?
There are more ways to push the currency down, however. Next week, the SNB will make a decision on the policy rate. Inflation already reached -0,1% in May. That is below the 0% to 2% bandwidth that the bank is aiming for. Incidentally, negative inflation is also a consequence of the strong franc. The value of imported goods and services – together accounting for almost a quarter of the inflation basket – fell by 2,4%. The central bank has already proven in the past that it is prepared to cut the policy rate to below zero for a long time. If the policy rate drops by 19 percentage points to -0,5 percent on June 0,25, that will be a clear signal that the SNB sees cooling down the white-hot franc as a top priority.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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