On September 6th, 2011, the Swiss National Bank (SNB) shocked markets by announcing that the Swiss Franc was to be pegged to the Euro at an exchange rate of 1.20 (EUR/CHF). This was a move announced in the, “strongest language from a central bank in the modern era”. To further highlight the severity of what this meant, the Swiss Franc dove 9.32 percent to 1.212 francs per Euro just after the announcement in what Chief Economist at World First (a foreign exchange broker) Jeremy Cook called, “the single largest foreign exchange move I have ever seen (…) This dwarfs moves seen post Lehman Brothers, 7/7, and other major geopolitical events in the past decade".
Critics were quick to point out that this would have repercussions in the form of intensified currency wars, with the Japanese for example likely to implement similar measures to slow the Yen’s appreciation in future. The Swiss Franc’s image as a safe haven currency immediately took a hit. With the world’s other major currencies all in trouble (especially USD and EUR), gold, already overvalued, appeared as one of very few alternatives left for market participants seeking safety (it reached an all-time high on the day of the SNB announcement of over $1920). The SNB decision was flagged as an uncooperative and drastic move, only further destabilizing the developed world in uncertain times.
However, people analyzing this from a global macro perspective are quick to overlook what a dramatic impact the currency appreciation was having on Switzerland. It was regarded as an, 'acute' threat to the economy and labour market. It was estimated to be a risk factor that could lead to recession and deflation. To display the extent this affected the economy, consider food maker Nestle whose first-half sales in 2011 were down 13%, although they rose 7.5% on an absolute, currency adjusted basis. Credit Suisse announced losses of even greater magnitude where revenues would have been 37.7% higher without Franc appreciation. Efficient companies performing well are suffering. All sectors are affected, hotels expecting 3 to 5% less guests, workers are having to accept increased working hours to make up for lost competitiveness and major retailers are taking dozens of products off shelves after failed price cut negotiations with manufacturers. Ironically, the entire economy, which fundamentally is doing very well and is stable, is under immense pressure because of this reason (such strength being the cause for many investors to invest in the Franc).
Additionally, two factors worsened fears. Firstly, any previous attempts by the SNB to intervene and cool the franc had failed, prominently displayed in the loss of SFr14.3 billion ($14.8billion) generated by the SNB after massive Euro purchases between March 2009 and June 2011 which did close to nothing to stop the currency’s rise. Secondly, the breakneck speed of appreciation was something that had an effect as companies were not having time to react or implement safety measures before it was too late.
This reveals how, from a Swiss person’s perspective, the currency intervention was an impressive and successful development. It reminds many of the move taken in a similar environment in the 70s when Switzerland implemented negative real interest rates to prevent excess capital flows due to similar reasons people are seeking out the Franc today, an unheard of move at the time. As a whole, the Swiss feel delight and are comforted by the fact that their central bank, as well as politicians, are able to act quickly when they need to in the interest of their people, even if this means internationally unpopular and/or dramatic unprecedented moves such as this one. This is comforting especially in light of the relatively slow political progress of many other countries in the western world in 2011.
http://online.wsj.com/article/SB10001424053111904006104576499430671400702.html
