The adage in financial markets is “do not fight the central bank”. But can central banks fight the US president? The Swiss National Bank (SNB) may be about to find out.
Swiss policymakers are, not for the first time, stuck in the crossfire of their peers. As central banks in both the US and the eurozone shift into rate-cutting mode, the Alpine nation must choose between allowing the franc to strengthen, hurting inflation in the process, or risking the wrath of the US administration by intervening in its currency.
Already, the franc is uncomfortably strong. Its status as a haven, a magnet to investors in times of stress, means it is already trading at its strongest level against the euro in two years. Rate cuts from other heavy-hitting central banks would be likely to generate even more inflows. Despite having some of the most deeply negative interest rates in the world at minus 0.75%, the franc is “poised to be one of the key beneficiaries” from the global shift to rate cuts, in the words of JPMorgan analysts.
Swiss policymakers could choose to put up with a strong franc, or they might cut rates further into negative territory at the next meeting in September. Another option is to follow through on their perennial threat to intervene, something the central bank last did especially heavily in the depths of the eurozone debt crisis.
US president Donald Trump has sharpened his rhetoric, accusing both China and Europe of keeping their currencies “unfairly” weak. The US Treasury removed Switzerland from its currency manipulator watch list in May this year, but the country’s trade surplus with the US still makes it a prime target for the president’s ire. As JPMorgan pointed out, “Trump’s increasing vociferousness on currencies and monetary policy . . . will preclude any franc weakening from SNB intervention”.
This could be good news for any hedge funds keen to take on the SNB by buying the franc – a tactic that has failed spectacularly in the past.
“The [franc is] ultimately going to prove harder . . . to systematically undermine via central bank monetary policy, if a more general ‘race to the bottom’ is afoot amid a new environment of currency wars,” said Shahab Jalinoos, a currencies strategist at Credit Suisse.
Copyright The Financial Times Limited 2019