Switzerland is one of the richest places on the planet but it isn’t all sunshine and alpine flowers when you’re encircled by the world’s biggest trading bloc: the European Union. While the Swiss are pretty nimble in managing this unfortunate state of affairs, there are limits to what they can do.

Take currency. The Swiss National Bank is facing the perennial dilemma of an over-strong franc stifling its export-led economy, leading to a halving of growth over the past year. Instability in some emerging markets and Italy, as well as fears about a global trade war and a euro area recession, have encouraged investors to pile into the haven of the Swiss franc, which is trading as its strongest level in more than two years.

The SNB is widely believed to have been intervening to weaken its currency; the telltale sign being that so-called “sight deposits” have risen at the central bank. This is the cash commercial banks hold there, which economists consider an early indicator of SNB moves in foreign exchange markets. But it’s all been to no avail as the franc has carried on strengthening against the euro.

The problem for Switzerland is that its room for maneuver is so limited by its euro zone neighbors. With the European Central Bank’s rate set at -0.4%, the SNB’s is at -0.75% to try to deter FX investors attracted by its more alluring haven status. And with the markets expecting another cut from Mario Draghi’s ECB in September, people are preparing themselves for a fresh reduction from the Swiss central bank to maintain the buffer.

Both for the ECB and the Swiss the priority is stopping their currencies from rising and hurting exporters. It’s just that Bern, unlike Frankfurt, is a price-taker not a price-maker.

The SNB may even have to lower its official deposit to below -1% to dissuade those safe haven flows. It might also implement other smart measures such as stepping up its highly successful policy of purchasing overseas equities with its burgeoning foreign currency reserves.


At least the Swiss are better at using the element of surprise than most central banks. They haven’t taken policy action at a formal meeting for a decade – instead choosing the best moment. In 2015, just before the ECB introduced its monster 2.7 trillion euro ($3 trillion) bond-buying program, the SNB ambushed everyone by dropping its ruinously expensive policy of intervening to sell its own currency whenever the franc threatened to rise beyond 1.20 per euro. It was one of the most brutal actions a major central bank has ever taken. When the cap was dropped, the franc appreciated by almost 30% against the currencies of the Group of 10 industrialized nations– unprecedented for a global reserve currency. 

That 2015 policy shift means the Swiss are largely stuck with cutting their interest rates to defend the currency. But the knock-on impact of that has been seriously challenging: The country’s entire yield curve (the rates on all different maturities of bonds) is substantially below zero. Its 10-year yields are already nearing -1%. Even Swiss corporate bonds don’t yield much. Nestle SA, the food group, won the dubious honor of becoming the first company whose 10-year debt in euros fell below zero yield.

This is all bad news for Switzerland’s legions of savers and for its huge private banking industry, which has started charging wealthy customers for their deposits. While incredibly low funding rates help the country’s corporate sector and government financing, that’s outweighed by an over-mighty currency that crimps exports. Switzerland isn’t alone in this dilemma of trying to keep its currency from appreciating versus the euro. The Scandinavian countries face a similar challenge.

Reacting ahead of time to more ECB easing may soften the blow but it doesn’t alter the reality that the currency game is weighted heavily against the EU’s closest neighbors. Central bank rate shifts and currency wars have casualties. Size matters.

(This column was updated to clarify the 2015 rise in the Swiss franc.)

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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