USD/CHF: Primary Obligations

The US Fed has indicated its determination to increase its benchmark Fed Funds rate target from 0.00% - 0.25% to 0.25% - 0.50% at the 15-16 December policy assessment meeting. This will mean a strengthening of the USD vs just about every other advanced economy on the planet. Currently, the USD is trading at a virtual parity with the Swiss Franc, 0.9963 Franc per. Hence, the USD will likely gain on the Swiss Franc. This will be a bit of welcome news for the Swiss National Bank, since it just can’t seem to do enough to weaken the Franc for any length of time. The US Fed has given every indication that its policy shift will be slow and gradual after the initial increase. The question then becomes that of whether the efforts of the Fed towards a strengthening US Dollar coinciding with the efforts of the SNB to weaken the France will result in a sustained trend lower, above parity, versus the US Dollar.

The US and Switzerland have a respectable trade relationship, but nothing out of the ordinary. About 10% of US exports, totaling £35.3 billion are destined for Switzerland and about 8% of Swiss exports, totaling £47 billion are destined for US markets. The top US exports to Switzerland are precious metals, pharmaceutical products, arts and antiques, medical equipment and Aircraft . Agricultural products include tobacco, soybean, tree nuts, wine and beer. As far as Swiss exports to the US, top products include pharmaceuticals, optic and medical instruments, clocks, watches and machinery. Agricultural products included snack foods, chocolate, cheese and coffee.

Switzerland ranks 14/15 as an export/import partner; a healthy trade no doubt, but there’s nothing critical or strategic in the mix. In fact, a stronger US Dollar would make Swiss consumer staple and discretionary products more price competitive in the US market. On the other hand, aircraft orders, for example Boeing products, span years from the date of the order to physical delivery and usually currency hedged; hence, a strengthening US Dollar will have little effect in Swiss markets. Specifically, the US and Switzerland do not have a competitive nor strategic trade partnership.



Switzerland is legendary for being an asset ‘safe haven’. As such, its reputation contributes to unwanted capital inflows, driving yields lower and strengthening the Franc well beyond what the SNB considers acceptable. As an aside, Switzerland does not stand alone as a wealth safe-haven. Denmark, committed to its ERM II agreement has fought of ‘waves’ of capital inflows in early 2015. Danmarks Nationalbank has accumulated record foreign currency reserves in its efforts to keep the Krone pegged to the Euro and within its ±2.5% range. Sweden, an EU member and Norway, a member of the European Free Trade Association have also experienced capital inflows. On 3 December, the ECB announced a 10 basis point reduction on overnight deposits, -0.30%, expand its asset purchase program beyond €60 billion monthly (no specifics yet) and to reinvest dividends earned from its purchased asset portfolio; hence a weaker Euro, stronger Franc.

What might have the greatest impact on those safe haven nations, although indirectly, is the announced plans to purchase “...euro-denominated marketable debt instruments issued by regional and local governments located in the euro area in the list of assets that are eligible for regular purchases by the respective national central banks ...” An interesting example of what might result from a lack of liquidity is that of Sweden’s Riksbank asset purchase program. The lack of liquidity, surprisingly, drove yields higher, creating demand and strengthening the Krona (refer to Bloomberg link below). The point is that even the less than expected ECB action announced at the 3 December press conference will most certainly create market demand for the specified assets, further reducing fixed income market liquidity with the possibility of an unexpected result. In particular, after the initial market reaction, the Euro exchange rates may, in short order, return to the pre 3 December rates. (N.B.: The unexpected reaction in the Swedish fixed income market may actually serve as a scaled down model which demonstrates that market liquidity has boundaries limiting the effectiveness of asset purchases). In any event, in order to preserve trade balance parity, the ECB action will require those export economies of non-Eurozone and non-EU nations, e.g. Switzerland, to react so that their efforts, to date, will not be undone.

Hence, it’s reasonable to expect that without any significant or strategic nor competitive connection in the Switzerland-US trade relationship, the fact the SNB will act determinedly to weaken the Franc and the expected effectiveness of the additional ECB QE measures, it’s unlikely that the Franc will continue to strengthen against the US Dollar.