Everyone commenting on the exchange rate, but nobody commenting on the negative interest rate? If you want to keep your money in CHF the Swiss banks are going to charge you 0.75% for the privilege.
This is the "safe asset premium". Given the uncertain world, people and organisations with vast wealth are looking for ways to maintain it. In a globally shrinking economy this is not as easy as it sounds. And it's a lot - for example, UBS have $2trn assets under management.
The corollary of this is that any investment proposal with a plausibly positive expected return looks good. Swiss banks have issued a lot of CHF mortgages on property in and out of the country. Property in the core stable parts of the western world has shot up in value (e.g. London), while the periphery remains depressed.
They started making them negative a month ago. It mostly just affects the rate that the banks pay to the central bank. It doesn't really affect individuals, not until you get into 10M CHF, and honestly, who would keep that much money in cash?
> The corollary of this is that any investment proposal with a plausibly positive expected return looks good.
Very true. This causes massive investment to take place, increasing productivity, and pushing down the price of goods, because they are now cheaper to produce.
In response to this price deflation, the central bank will lower interest rates further, increasing investment further, driving down prices further. And so on, and so forth, in a vicious circle. Japan has been in that circle for the past 20 years or so, being pulled deeper and deeper into deflation.
We, in the West, are earlier in this process, but our destination is the same as that of Japan.
The real interest rate vs USD or EUR may well be positive. Certainly if you already had CHF that 20% will take a while to be eaten away by the nominal negative rate, plus the CHF may well appreciate more with EUR QE expected.
The European Central Bank cut one of their rates to below zero in June 2014, iirc. Part of the reason you see this in Europe and not in the US (at least at the moment) is because of restrictions on where the ECB can put its money. For example, the ECB can't (or maybe won't? I'm not completely sure) buy bonds in its member countries.
Switzerland exports 27 billion USD more than it imports [1]. That means this is bad news for the swiss economy, since swiss products just became much more expensive for foreign buyers.
We (small startup/company in Switzerland) are mostly exporting our product. Today we changed from making a profit to making a loss with each system we sell...
It always seemed such a bad idea to me in the first place. If an actor is so predictable in the market, how can you prevent other people from benefiting from it ? Pump&dump.
> It introduced the cap in September 2011 and, in 2012, spent $199 billion defending the minimum rate.
To be clear, the SNB is not "spending" money. They were intervening to prevent the CHF from appreciating, not the reverse. In this situation, they (as the central bank) are creating new money (CHF), which they sell to anyone who wants to purchase them for EUR1.20 each.
The result of this is to accumulate enormous amounts of EUR, which is typically used to purchase EUR area government securities.
The SNB actually made a profit of CHF 38 billion in 2014 from price changes/interest on the securities they hold as well as FX gains. [1]
They of course will now be taking significant losses on those foreign currency assets as the CHF appreciates.
Well, the $199bn are not spent in the sense they are gone. The SNB of course now holds Dollars and Euros it bought with Franken. Of course, if the Franken now appreciates, they are taking a loss on those Dollars and Euros.
That buys them a lot of Euros, and stabilised the very large part of the Swiss economy that's dependent on financial services. This includes CHF-denominated Hungarian mortgages, which may now start defaulting again http://ftalphaville.ft.com/2011/08/03/642281/oh-schweizer/ (2011)
Little known fact:
SNB is actually a publicly traded company but exempted from various laws which usually apply stock corporations.
A share gets you entry and a vote at the general assembly which is known for its generous Apéro. While they do not have a dress code (you can appear with a Hoodie) Jean Studer is French speaking so a lot of the assembly will be in French.
you missed the part where the "SNB Unexpectedly Gives Up Cap on Franc, Lowers Deposit Rate".
When a central bank artificially sets an exchange ceiling/floor, and lets it float again freely expect the currency to adjust. That's not "market volatility", that's just the market adjusting to a true free-float.
One difference is that the primary currency manipulators involved with bitcoin are unknown (I guess it is not even really known how much the price is manipulated, I'm sure some insiders have an idea though).
Whereas the Swiss National Bank is known to be the manipulator here, and they publish a lot of information about their activities:
They do this because to peg the currency to the Euro meant they had to buy an unlimited amount of foreign currency to make up for it, which gets very expensive in the long run.
What this means in layman's terms (I'll do my best):
- If you are paid in Swiss Francs, your purchasing power in the Euro zone is stronger (since the prices you see will in effect be smaller to you).
- If you are paid in Swiss Francs and shop in Switzerland, the foreign products you buy will slowly become cheaper (although companies will try to keep the label price of goods "the same" in Switzerland, and pocket the difference). It will not have a direct impact on 100% Swiss products, however.
- If you are paid in Euros, visiting Switzerland and buying Swiss products just became more expensive.
- The Swiss firms exporting products might get hit, since their products are now more expensive to foreigners (that was the original point of pegging the CHF to the EUR in the first place - so they could export more).
- As others pointed out: the Swiss firms importing goods will have cheaper raw materials, too, so the price of some Swiss products should decrease as well (modulo some companies trying to pocket the difference by keeping the same face cost, again).
I'm sure I miss a few obvious points, but these changes of value affect such a wide range of things it's hard to think of everything :)
EDIT: Formatting and one omission :)
EDIT2: Added import of raw materials on the list. Thanks guys!
According to Thomas Jordan (SNB president), the previous policy was "not sustainable". Furthermore, the peg was presented as a temporary measure from the beginning. Their preferred scenario would have been a rising euro, which would have allowed a painless abondining of the peg.
Switzerland has something like 1/2 trillion in foreign currency reserves built up while trying to keep the franc at parity, putting them in a risky position. I think they were preparing for today - they recently lowered interest rates to negative, and now today dropped them even more negative.
Funny anecdote - the last time this happened around 3 or 4 years ago I was on a project in Germany and was surprised at how cheap everything was now with the exchange rate. Dining out felt like I was in India it was so cheap. We bought an Audi (in CHF) around then and they had to reduce the price 30% before the deal went through - then shortly after they pegged the franc to the euro.
Now hopefully the foreigners will start moving their money back into francs and let the property market cool off.
"Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified."
The SNB just had a 38 billion surplus in 2014 which they could use to write of their losses in euro investments, but they just stated they are not going to. They EUR is weakening against the USD and the SNB does not want the CHF to go down with it. Does that mean they lost trust in the EUR completely? People are speculating on Greece's exit from the EUR, which could further weaken it.
I guess exports and tourism will now suffer, but investments in the eurozone just got pretty cheap for the swiss.
A grexit would strengthen the euro, not weaken it. Greece has more imports than exports. A grexit will weaken the euro temporarily because of uncertainty but the effect will wear off quickly.
Huge. It was like NFP at 9.30 am today. Was wondering why my dev code was using more memory than normal. Looked at live graphs to see all hell was breaking loose. US open could be interesting.
Not too good news for developers working for foreign companies in Switzerland. (Google, etc.). They just got 15% more expensive without a salary raise.
This is incorrect. Nothing changed as they are paid in CHF and spend money in CHF. If they buy products from abroad, their spending power just increased by 15%.
It's not good news for Google, etc. as their Swiss employees just got 15% more expensive.
The point sz4kerto is making, as I understand it, is that the staff cost just jumped for these companies, meaning that some companies might seek to freeze any new hires or even lay off some workers.
When rates are lowered, it puts both competitve pressure and supply pressure on the currency. This can be seen in all historical interest rate cuts. You cut rates to weaken, and raise rates to strengthen.
And yet, this CUT in rates is leading to a BID for CHF.
My guess is it's to do with the relative state of the Euro. This move by the Swiss bank is effectively a vote of no confidence in the ECB being able to resolve the weakness there, so even though going into CHF is bad, it's judged to be less bad than sticking in EUR.
The interest rate has not been the main method of controlling the exchange rate in this case. There was an artificial CHFEUR peg maintained by selling Francs and buying Euro-denominated assets.
There are two things happening with opposite effects: releasing the peg and cutting rates. Since the CHF is strengthening, we know that releasing the peg is having a stronger effect than cutting rates.
[+] [-] pjc50|11 years ago|reply
This is the "safe asset premium". Given the uncertain world, people and organisations with vast wealth are looking for ways to maintain it. In a globally shrinking economy this is not as easy as it sounds. And it's a lot - for example, UBS have $2trn assets under management.
Edit from my other comment: this is the interbank target rate only, normal deposit rates are just above zero: http://www.ubs.com/ch/en/swissbank/private/interests.html
The corollary of this is that any investment proposal with a plausibly positive expected return looks good. Swiss banks have issued a lot of CHF mortgages on property in and out of the country. Property in the core stable parts of the western world has shot up in value (e.g. London), while the periphery remains depressed.
[+] [-] comrade1|11 years ago|reply
http://www.thelocal.ch/20141218/swiss-central-bank-imposes-n...
[+] [-] jpmattia|11 years ago|reply
BTW: Real interest rates have been negative for a while in the US. Even the 10yr Treasuries are there now. http://delong.typepad.com/sdj/2012/05/measures-of-real-inter...
[+] [-] runeks|11 years ago|reply
Very true. This causes massive investment to take place, increasing productivity, and pushing down the price of goods, because they are now cheaper to produce.
In response to this price deflation, the central bank will lower interest rates further, increasing investment further, driving down prices further. And so on, and so forth, in a vicious circle. Japan has been in that circle for the past 20 years or so, being pulled deeper and deeper into deflation.
We, in the West, are earlier in this process, but our destination is the same as that of Japan.
Or at least, that's one explanation of what is happening. :) A theory put forth in this article: http://www.gold-eagle.com/article/economic-consequences-mr-g...
[+] [-] branchless|11 years ago|reply
[+] [-] tribaal|11 years ago|reply
It that also means Swiss companies have an incentive to borrow money and invest it, though.
EDIT: Ah, it seems it only applies to inter-bank interest rates, not sure how it trickles down to end clients.
[+] [-] jeffreyrogers|11 years ago|reply
[+] [-] unknown|11 years ago|reply
[deleted]
[+] [-] mentose|11 years ago|reply
[1] http://www.bfs.admin.ch/bfs/portal/en/index/themen/06/05/bla...
[+] [-] nuriaion|11 years ago|reply
[+] [-] zimbatm|11 years ago|reply
> It introduced the cap in September 2011 and, in 2012, spent $199 billion defending the minimum rate.
Wow, spending almost 1/3 of the GDP of 2012 to maintain the EUR/CHF ratio ( http://www.wolframalpha.com/share/clip?f=d41d8cd98f00b204e98... ). I hope it was worth it.
[+] [-] ddeck|11 years ago|reply
The result of this is to accumulate enormous amounts of EUR, which is typically used to purchase EUR area government securities.
The SNB actually made a profit of CHF 38 billion in 2014 from price changes/interest on the securities they hold as well as FX gains. [1]
They of course will now be taking significant losses on those foreign currency assets as the CHF appreciates.
[1] http://bigstory.ap.org/article/eaafe09a860f4b09abc789fe6f5d2...
[+] [-] iSnow|11 years ago|reply
[+] [-] pjc50|11 years ago|reply
[+] [-] needusername|11 years ago|reply
[+] [-] lawl|11 years ago|reply
Eur fell as low as 0.79 from 1.2.
[+] [-] qnr|11 years ago|reply
[+] [-] antr|11 years ago|reply
When a central bank artificially sets an exchange ceiling/floor, and lets it float again freely expect the currency to adjust. That's not "market volatility", that's just the market adjusting to a true free-float.
[+] [-] maxerickson|11 years ago|reply
Whereas the Swiss National Bank is known to be the manipulator here, and they publish a lot of information about their activities:
http://www.snb.ch/en/iabout/stat/statpub/statmon/stats/statm...
[+] [-] alltakendamned|11 years ago|reply
[+] [-] tribaal|11 years ago|reply
What this means in layman's terms (I'll do my best):
- If you are paid in Swiss Francs, your purchasing power in the Euro zone is stronger (since the prices you see will in effect be smaller to you).
- If you are paid in Swiss Francs and shop in Switzerland, the foreign products you buy will slowly become cheaper (although companies will try to keep the label price of goods "the same" in Switzerland, and pocket the difference). It will not have a direct impact on 100% Swiss products, however.
- If you are paid in Euros, visiting Switzerland and buying Swiss products just became more expensive.
- The Swiss firms exporting products might get hit, since their products are now more expensive to foreigners (that was the original point of pegging the CHF to the EUR in the first place - so they could export more).
- As others pointed out: the Swiss firms importing goods will have cheaper raw materials, too, so the price of some Swiss products should decrease as well (modulo some companies trying to pocket the difference by keeping the same face cost, again).
I'm sure I miss a few obvious points, but these changes of value affect such a wide range of things it's hard to think of everything :)
EDIT: Formatting and one omission :)
EDIT2: Added import of raw materials on the list. Thanks guys!
[+] [-] Hermel|11 years ago|reply
[+] [-] comrade1|11 years ago|reply
Funny anecdote - the last time this happened around 3 or 4 years ago I was on a project in Germany and was surprised at how cheap everything was now with the exchange rate. Dining out felt like I was in India it was so cheap. We bought an Audi (in CHF) around then and they had to reduce the price 30% before the deal went through - then shortly after they pegged the franc to the euro.
Now hopefully the foreigners will start moving their money back into francs and let the property market cool off.
[+] [-] michaelcampbell|11 years ago|reply
How does this not cause a run on the banks? (Serious question)
[+] [-] nico_h|11 years ago|reply
- 1799€ -> 1845CHF (->$2110) on the French Apple store.
- 1949CHF -> 1900€ (->$2228) on the Swiss Apple store.
The kicker here is that the VAT is 8% in Switzerland and 19+% in France, and yet the laptop is 100€ cheaper in France.
[+] [-] sschueller|11 years ago|reply
[+] [-] config_yml|11 years ago|reply
http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_2...
The SNB just had a 38 billion surplus in 2014 which they could use to write of their losses in euro investments, but they just stated they are not going to. They EUR is weakening against the USD and the SNB does not want the CHF to go down with it. Does that mean they lost trust in the EUR completely? People are speculating on Greece's exit from the EUR, which could further weaken it.
I guess exports and tourism will now suffer, but investments in the eurozone just got pretty cheap for the swiss.
[+] [-] tormeh|11 years ago|reply
[+] [-] ExpiredLink|11 years ago|reply
Yep, they should all emigrate to the EU!
[+] [-] sschueller|11 years ago|reply
[+] [-] easytiger|11 years ago|reply
[+] [-] sz4kerto|11 years ago|reply
[+] [-] furyg3|11 years ago|reply
It's not good news for Google, etc. as their Swiss employees just got 15% more expensive.
[+] [-] xianshou|11 years ago|reply
[+] [-] FredericJ|11 years ago|reply
[+] [-] jevgeni|11 years ago|reply
[+] [-] oldspiceman|11 years ago|reply
[+] [-] throwaway90446|11 years ago|reply
When rates are lowered, it puts both competitve pressure and supply pressure on the currency. This can be seen in all historical interest rate cuts. You cut rates to weaken, and raise rates to strengthen.
And yet, this CUT in rates is leading to a BID for CHF.
As they say in Geneva, WTF?
[+] [-] fidotron|11 years ago|reply
[+] [-] jsnell|11 years ago|reply
[+] [-] a_c_s|11 years ago|reply
[+] [-] emeidi|11 years ago|reply
[+] [-] tobltobs|11 years ago|reply
[+] [-] ExpiredLink|11 years ago|reply
[+] [-] ExpiredLink|11 years ago|reply