The Swiss franc is the top G10 FX riser in 2020 despite direct intervention from the SNB that could land the country labelled as a currency manipulator.
- The US Treasury added Switzerland to its shortlist for countries that could be labelled a currency manipulator in January 2020
- Once designated a currency manipulator, the US can (but does not have to) impose sanctions, tariffs and seek redress with the IMF
- The report was due in the summer and in October but has been delayed because of the covid-19 crisis.
- The Swiss national bank has sold more than $100 billion worth of Swiss franc this year
- CHF is the top G10 FX riser this year, rising more than 10% over the US dollar (USD/CHF -10%)
- Technical Analysis: EUR/CHF in possible downtrend reversal
Switzerland will likely meet the criteria to be identified as a currency manipulator by the United States in a semi-annual report issued by the US Treasury. The Treasury uses 3 criteria for the designation: intervening in currency markets by more than 2% of GDP, having a bilateral trade goods surplus of more than $20 billion and a current account surplus of more than 2%. By selling the equivalent of $100 billion worth of Swiss franc in just H1 of 2020, the Swiss have already spent 8% of GDP. Although the Swiss have intervened heavily in foreisng exchange markets, the Swiss franc is still a top rising currency this year.
Would the US actually do it?
The argument that Switzerland is too small a country didn’t cut it when the United States targeted its bank secrecy laws in the aftermath of the financial crisis. If the money flows are large enough the US could decide it’s worth the potential upset to global markets.
The label seems less likely under President-elect Joe Biden that it would have been under Donald Trump, who made trade a signature part of his Presidency.
There is of course extenuating circumstances this year because the coronavirus pandemic sent investors in search of haven currencies, something that has also impacted the Japanese yen. Switzerland as a small country relies heavily on exports so currency market intervention has always formed a stronger part of central bank policy in Switzerland than in for example the US, which is a more domestically-focused economy. Switzerland already has a deposit rate set at -0.75% - the lowest in the world – so more rate cuts are really not a possible course of action for the SNB.
The wider question for the US is whether it would have the intended effect. From a Swiss perspective the least worst scenario would probably be to contravene the US rule rather than cause a deflationary contraction by allowing the franc to appreciate.
The Swiss National Bank is also one of the largest foreign owners of US assets. The Swiss have $1 trillion in foreign reserves, around a third of which is in US dollars. The SNB also invests in US assets as diverse as technology stocks, unlike other central banks that typically only hold gold and foreign currencies in reserve.
On the face of it, when there are bigger fish to fry and when there is such economic uncertainty already, it seems unlikely the US would do it, but it’s worth thinking about what would happen if they did.
What would it mean for CHF?
Were the US to decide to designate the Swiss as currency manipulators, it would make it harder for the Swiss National Bank to continue its large-scale forex market interventions, which in turn would affect the value of the Swiss franc – likely causing it to appreciate.
The Swiss franc is the biggest riser among major (G10) currencies this year, gaining over 10% in value versus the US dollar. The gains have been much more muted against the euro because this is where the Swiss are intervening. The SNB essentially buys the EUR/CHF forex pair.
The Swiss intervention is largely versus the euro because Switzerland does the bulk of its trade with the European Union. The euro has been rising in the past few months, alleviating some pressure on the central bank to intervene in currency markets. If investors are buying euros and selling francs, the Swiss authorities don’t need to intervene and the US needn’t cast any labels.
Once Switzerland is designated a currency manipulator, the US can (but does not have to) impose sanctions, tariffs or other punitive measures and seek redress from the IMF. For its part, the IMF earlier in the year called the Swiss policy “appropriate”. It’s possible the US would add Switzerland to the list as a further warning without taking action.
The threat of being labelled a currency manipulator could mean some of the Swiss franc appreciation this year is pricing in the possibility. Still given that it is unlikely, the currency would likely gain further were it to happen. However, the more likely result looks to be that the US NOT labeling the Swiss as currency manipulators could add some downward pressure on the Swissie (upward pressure on EUR/CHF).