Why a strong currency is causing problems for Switzerland

The trade policies of American president Donald Trump have shook global actions in recent weeks, which has prompted investors to seek security pockets on the financial markets.

One of the beneficiaries of market volatility was the SWISS FRANCELargely considered as an asset of safe refuge in times of macroeconomic or geopolitical uncertainty. The Swiss currency has appreciated 10% compared to the US dollar since the start of the year – but within the borders of Switzerland, the growing demand for francs arouses challenges for decision -makers.

The Swiss franc was last seen exchanging 0.2% against the greenback, with $ 1 buying approximately 0.82 Swiss francs. The currency of Switzerland, which was exchanged flat earlier Wednesday, rallied after the ADP data showed hiring slowed down to a two -year hollow in the US private sector last month.

A strong frank exerts a deflationary pressure on Switzerland. As money is appreciated, imports – which play an important role in the country’s economy – become cheaper.

For some countries, this effect could be a welcome stay of sticky inflation. But while many have developed markets, as The United States And The United KingdomAlways work to bring inflation to their 2%objectives, Switzerland is faced with the opposite problem: prices drop too much.

Swiss inflation became negative in May, the country’s consumer price index dropped by 0.1% in annual shift. The price of imported goods contracts considerably, lowering 2.4% on an annual basis after being flat the previous month.

Charlotte de Montpellier, senior economist in France and Switzerland in ING, noted the role played by the currency rally in the image of the country’s inflation.

“The last drop is largely motivated by external factors,” she said in a note on Tuesday. “A strong Swiss franc has considerably reduced the cost of imported goods … Since imports represent 23% of the IPC basket, this has a significant impact on overall inflation in Switzerland.”

May data marked Switzerland’s first return to deflation from the Pandemic COVID-19. He could push the Swiss National Bank to the use of two key policies previously implemented to respond to what De Montpellier called “persistent headache” for the central bank.

The SNB ended a period of seven years of negative interest rate in 2022 – an unpopular policy with savers and lenders because they eliminate yields from savings deposits and Prepare the margins and profitability of banks.

During its last meeting in March, the central bank reduced its key rate of 25 basis points to 0.25%.

In the wake of this week’s inflation data, the SNB should “seek to fight against the appreciation of the Swiss franc with the weapons at its disposal,” said Montpellier.

ING expects SNB to reduces its 25 -point key interest rate at its next meeting later this month – and Montpellier argued that other discounts will likely follow.

“Based on current data, a return to negative interest rates before the end of the year seems more and more likely,” she said. “Our basic case includes a second decrease of 25 bp in September, bringing the policy rate to -0.25%. Although the SNB prefers to avoid deeper cuts, a reduction of 50 bp in June cannot be excluded.”

While Ing expects Swiss decision -makers to stop reducing rates to -0.25%, from Montpellier said that a new strengthening of the Swiss franc “could force [the SNB’s] Main, “leave it with other choices than take rates further in a negative territory.

Lily Fang, professor of financing at the INSEAD business school, told CNBC that the current conditions were likely to repel Switzerland in a negative rate environment – a decision that the president of the SNB Martin Schlegel A Stay stressed on the table.

“The Swiss authorities are clearly concerned, because … It is a small open economy that is based on international trade, and the United States in particular is their most important trading partner beyond the EU block,” said Fang during a telephone call.

“Switzerland has already taken front and lowered the rates before the EU. I think it is very likely to go to zero and even negative.”

In 2020, the US Treasury, under the first Trump administration, Swiss labeled a currency manipulatorAccusing him of deliberately devaluing the Swiss franc against the greenback. The BNB denied these allegations at the time.

Trump Complete list of so-called reciprocal rates said that “the manipulation of currencies and trade barriers” had been taken into account in the calculation of countries that have imposed countries in the United States. The administration said they calculated that Switzerland – which abolished all industrial prices last year – Prices billed 61% in the United States, and it would therefore lead new 31% tariffs on Swiss goods.

While D’Ing de Montpellier admitted that any possible FX intervention of SNB risked “provoking the anger of the American administration”, it argued that it was probably that the central bank would intervene in the markets in the coming months.

Alex King, a former FX trader and founder of the personal finance platform Generation Money, agreed that any direct purchase of foreign currencies by the SNB was “unlikely to stay well with the American administration”.

“When Switzerland was described as currency manipulator in 2020, the threat of prices was not such a major factor, but he now has a dilemma in his hands,” he told CNBC in an email. “If it were to work directly on the FX markets, it could be affected by higher American prices, and the negative impact could be worse than short -term inflationary pressures.”

Last month, SCHLEGEL DE SNB said that Swiss officials had had constructive talks with the United States on Central Bank FX interventions, in the comments Cited by Bloomberg.

“We have never influenced the exchange rate to get an advantage,” he said to an audience in the Swiss city of Lucerne.

“I am not sure that they will go immediately and will use the intervention of the currencies, market intervention, because the United States tends to be … Labeling the manipulators of the” “countries, added the Croc of Insead.” I do not think they really want to be labeled as a manipulator, [so] I think they will probably use it as a last resort tool. “”