Swiss franc strength hits exports
WHILE the European sovereign debt crisis rages on, Switzerland sits in the eye of the economic storm. Though the Swiss have been prudent where their European Union neighbours have been profligate, their economy is nevertheless suffering from the effects of the European turmoil.
The longer the European crisis continues, the higher the Swiss franc will climb, squeezing the life out of Swiss exporters.
“The Swiss franc is strengthening for a number of reasons, the most prominent being a flight to quality in light of concerns over sovereign debt and continued worries over inflation and growth in the global economy,” says Steven Braithwaite, director of FX trading at RBC Dexia. “Taking a long position in gold tends to be the primary inflation trade and going long on the Swiss franc is a haven from heightened geopolitical risk.”
And the Swiss franc is not just at a high against the ailing Eurozone. The EU still accounts for 60 per cent of Swiss exports, but figures for last year show that growth in exports to emerging markets was greater than to the EU. So the euro-Swiss franc is not the only important pairing for the Swiss economy. Even the commodity inflated Australian and Canadian dollars are 7 and 8 percent weaker in Swiss franc terms since the beginning of the year. According to Mark Thompson, senior commercial dealer at Global Reach Partners: “Latest export figures show that the strong franc is weighing on overseas sales of Swiss goods and services, however this effect is not as dramatic as you would expect. The stronger franc is also acting as an inflation control mechanism while other European nations continue to battle with rising prices.” Interestingly, despite these supposedly austere times, a recent statistic indicated that sales of Swiss watches were up 40 per cent in May. However, it may be simply a period of calm before Swiss franc strength really starts to damage its export economy.
DELAYED EFFECTS ON EXPORTS
“From an export point of view, there is a lag between rises in the franc and an effect on Swiss exporters,” says Ken Dickson, investment director for currency and foreign exchange for Standard Life Investments. “What seems to be happening for the moment is that exporters are having their profit margins squeezed, and so the currency rises are being absorbed by their balance sheets.” Swiss exporters can’t carry on absorbing a strengthening franc forever. As Swiss franc strength continues, you are going to see exporters losing orders. Reports from the Swiss National Bank (SNB) indicate that this is beginning to happen.
It is unlikely that the central bank will take measures to revalue the currency. The SNB has tried this in the past, and it proved to be very expensive and didn’t achieve anything significant. With the sheer volume of currency flows into the franc, the tide is certainly not in the favour of any success this time. As long as the volatility in the Eurozone continues, it seems that the Swiss are just going to have to sit it out until the Eurozone sovereign debt storm subsides.