http://www.bloomberg.com/news/2011-08-03/silent-scream-of-swiss-franc-shows-great-distortion-amid-great-moderation.html?cmpid=
Swiss exporters are being tortured as investors flee the euro region debt crisis for the haven of the franc’s fiscal virtue.
The franc has surged 42 percent since the start of 2008 against a basket of currencies of Switzerland’s main trading partners, after remaining little changed over the previous decade. With the Organization for Economic Cooperation and Development now calculating that the franc is the world’s most overvalued currency, the Swiss central bank yesterday unexpectedly cut interest rates to zero to dull its allure.
The franc has swung away from its 10-year average as investors pile into the currency to find a haven from turmoil provoked by the debt crisis in Europe and the political standoff over the U.S. government’s borrowing limit. That’s throttling foreign earnings of Swiss exporters including watchmaker Swatch Group AG (UHR) and ABB Ltd. (ABBN), the world’s largest maker of power-transmission gear.
“We’re losing money every day,” Daniel Frutig, chief executive officer of AFG Arbonia-Forster Holding AG, a maker of heating technology, said in an interview in Zurich yesterday.“Little changes in the currency have dramatic throughputs on our profits. The situation is extremely critical.”
Frutig said Arbon-based AFG may try to buy its way out of trouble by acquiring companies in the euro region to spread his firm’s cost base.
Japan Intervenes
Japan, also faced with a strengthening currency that threatened to damage its export competitiveness, intervened in the foreign-exchange market today. Japan acted alone in the market, while officials were in contact with other nations, Finance Minister Yoshihiko Noda told reporters in Tokyo today.
The franc plunged to 1.0942 versus the euro yesterday after earlier reaching a record 1.0796. Against the dollar, the currency traded at 76.64 centimes after touching an all-time high of 76.10 centimes yesterday. The franc traded at 1.1092 against the euro at 11:06 a.m. today in Tokyo, while the yen dropped 1.7% to 78.36 per dollar.
The franc’s appreciation has accelerated in the past month as European politicians struggled to assure investors that the Greek crisis won’t engulf Spain and Italy and as President Barack Obama battled to renew the U.S. government’s borrowing authority. In contrast to the U.S. and the euro region,Switzerland forecasts budget surpluses in every year through 2015 and boasts a jobless rate of 3 percent.
The franc is also favored because Switzerland has a current-account surplus, the broadest measure of trade, meaning it doesn’t need to rely on foreign capital to balance its books.
Gold climbed to a record $1,675.90 an ounce yesterday and has risen 40 percent in the past year. The franc jumped 36 percent against the dollar in the same period.
While Switzerland’s exporters have been able to weather past franc gains partly by focusing on high-quality goods such as power transmission gear as well as pharmaceuticals, the current surge is the most severe over the past two decades with the so-called real franc exchange rate increasing 20 percent in two years, according to the KOF Swiss Economic Institute.
“The danger is that we’ll face a lack of profitability,”said Juerg Brand, chairman of Zug-based piping-systems maker VonRoll Infratec AG, which is paying some salaries in euros.“Bigger firms will outsource, they will start production abroad, they will buy from abroad. In the long run, Switzerland risks losing its industrial capacity.”
Exports account for about half of gross domestic product, making Switzerland more vulnerable to currency swings. The benchmark Swiss Market Index (SMI) has slumped 15 percent this year, compared with the 9.2 percent drop of France’s CAC 40 Index while Germany’s DAX Index has shed 4 percent.
While the SNB yesterday didn’t indicate whether it’s ready to start selling the franc in markets again, the currency fell as much as 3 percent against the euro after policy makers said they are ready to “take further measures” if needed. The Zurich-based SNB also said it will boost the supply of liquidity to the franc money market.
For some economists, the SNB will struggle to put a brake on the franc.
“The franc isn’t driven by interest rates differentials at the moment, but by investors’ risk aversion,” said Thorsten Polleit, an economist at Barclays Capital in Frankfurt. “The Swiss franc’s appreciation will seriously curb Swiss economic expansion this year. Today’s measures will do little to alleviate the situation.”
In Zurich, home to UBS AG (UBSN) and Swiss Life Holding AG (SLHN), some restaurants are touting meals in euros to avoid losing money to tourists from euro-region countries. At Swiss Chuchi, meaning Swiss kitchen, located just off the river Limmat, the menu offers a cheese fondue for four for 126 francs ($165) or 97 euros ($139). The actual bill derived from the spot rate at 7 a.m. each day may show a different total.
“The prices are completely insane,” said Peter Eaver, a 20-year old student visiting Zurich from Norwich, England. “I knew it was going to be expensive but I didn’t think it was going to be as expensive as it is.”
With bond yields on Spain and Italy closer to euro era highs and the U.S. still trying to avoid a downgrade by rating companies, the franc nevertheless still holds some attraction for investors. It may remain the “least ugly” among global currencies, according to Daragh Maher, deputy head of global foreign-exchange strategy at Credit Agricole SA in London.
“No currency do you look at and kind of go ‘well, that’s fantastic,’ maybe aside” from the franc, Maher said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” withTom Keene on Aug. 2. “All the others are ‘ugh, that’s pretty grim.’”
Swiss exporters are being tortured as investors flee the euro region debt crisis for the haven of the franc’s fiscal virtue.
The franc has surged 42 percent since the start of 2008 against a basket of currencies of Switzerland’s main trading partners, after remaining little changed over the previous decade. With the Organization for Economic Cooperation and Development now calculating that the franc is the world’s most overvalued currency, the Swiss central bank yesterday unexpectedly cut interest rates to zero to dull its allure.
The franc has swung away from its 10-year average as investors pile into the currency to find a haven from turmoil provoked by the debt crisis in Europe and the political standoff over the U.S. government’s borrowing limit. That’s throttling foreign earnings of Swiss exporters including watchmaker Swatch Group AG (UHR) and ABB Ltd. (ABBN), the world’s largest maker of power-transmission gear.
“We’re losing money every day,” Daniel Frutig, chief executive officer of AFG Arbonia-Forster Holding AG, a maker of heating technology, said in an interview in Zurich yesterday.“Little changes in the currency have dramatic throughputs on our profits. The situation is extremely critical.”
Frutig said Arbon-based AFG may try to buy its way out of trouble by acquiring companies in the euro region to spread his firm’s cost base.
Japan Intervenes
Japan, also faced with a strengthening currency that threatened to damage its export competitiveness, intervened in the foreign-exchange market today. Japan acted alone in the market, while officials were in contact with other nations, Finance Minister Yoshihiko Noda told reporters in Tokyo today.
The franc plunged to 1.0942 versus the euro yesterday after earlier reaching a record 1.0796. Against the dollar, the currency traded at 76.64 centimes after touching an all-time high of 76.10 centimes yesterday. The franc traded at 1.1092 against the euro at 11:06 a.m. today in Tokyo, while the yen dropped 1.7% to 78.36 per dollar.
The franc’s appreciation has accelerated in the past month as European politicians struggled to assure investors that the Greek crisis won’t engulf Spain and Italy and as President Barack Obama battled to renew the U.S. government’s borrowing authority. In contrast to the U.S. and the euro region,Switzerland forecasts budget surpluses in every year through 2015 and boasts a jobless rate of 3 percent.
The franc is also favored because Switzerland has a current-account surplus, the broadest measure of trade, meaning it doesn’t need to rely on foreign capital to balance its books.
‘Safest Assets’
“There is a lot of bad news and people are looking for the safest assets,” said Nick Kounis, head of macroeconomic research at ABN Amro NV in Amsterdam. “You’re left with the franc and maybe gold. There’s not an endless list of options.”Gold climbed to a record $1,675.90 an ounce yesterday and has risen 40 percent in the past year. The franc jumped 36 percent against the dollar in the same period.
While Switzerland’s exporters have been able to weather past franc gains partly by focusing on high-quality goods such as power transmission gear as well as pharmaceuticals, the current surge is the most severe over the past two decades with the so-called real franc exchange rate increasing 20 percent in two years, according to the KOF Swiss Economic Institute.
‘Substantial Pressure’
Swatch Chief Executive Officer Nick Hayek told SonntagsZeitung in an interview published on July 31 that the watchmaker has to accept declining earnings prospects. Zurich-based ABB this month called the franc’s ascent “challenging.”Swiss chemicals maker Lonza Group AG (LONN), based in Basel, said last month that earnings are “under substantial pressure.”“The danger is that we’ll face a lack of profitability,”said Juerg Brand, chairman of Zug-based piping-systems maker VonRoll Infratec AG, which is paying some salaries in euros.“Bigger firms will outsource, they will start production abroad, they will buy from abroad. In the long run, Switzerland risks losing its industrial capacity.”
Exports account for about half of gross domestic product, making Switzerland more vulnerable to currency swings. The benchmark Swiss Market Index (SMI) has slumped 15 percent this year, compared with the 9.2 percent drop of France’s CAC 40 Index while Germany’s DAX Index has shed 4 percent.
Appreciating Currency
The Swiss central bank has been grappling on and off with its exchange rate since March 2009. The SNB in June 2010 abandoned its campaign to stop the currency’s appreciation that led to a record $21 billion loss last year and the franc has gained 27 percent against the euro since then.While the SNB yesterday didn’t indicate whether it’s ready to start selling the franc in markets again, the currency fell as much as 3 percent against the euro after policy makers said they are ready to “take further measures” if needed. The Zurich-based SNB also said it will boost the supply of liquidity to the franc money market.
For some economists, the SNB will struggle to put a brake on the franc.
“The franc isn’t driven by interest rates differentials at the moment, but by investors’ risk aversion,” said Thorsten Polleit, an economist at Barclays Capital in Frankfurt. “The Swiss franc’s appreciation will seriously curb Swiss economic expansion this year. Today’s measures will do little to alleviate the situation.”
Economic Slowdown
The Swiss economy is showing increasing signs of slowdown. The KOF leading indicator dropped for a third month in July, investor confidence fell to the lowest in 2 1/2 years and a consumption indicator slipped in June.In Zurich, home to UBS AG (UBSN) and Swiss Life Holding AG (SLHN), some restaurants are touting meals in euros to avoid losing money to tourists from euro-region countries. At Swiss Chuchi, meaning Swiss kitchen, located just off the river Limmat, the menu offers a cheese fondue for four for 126 francs ($165) or 97 euros ($139). The actual bill derived from the spot rate at 7 a.m. each day may show a different total.
“The prices are completely insane,” said Peter Eaver, a 20-year old student visiting Zurich from Norwich, England. “I knew it was going to be expensive but I didn’t think it was going to be as expensive as it is.”
With bond yields on Spain and Italy closer to euro era highs and the U.S. still trying to avoid a downgrade by rating companies, the franc nevertheless still holds some attraction for investors. It may remain the “least ugly” among global currencies, according to Daragh Maher, deputy head of global foreign-exchange strategy at Credit Agricole SA in London.
“No currency do you look at and kind of go ‘well, that’s fantastic,’ maybe aside” from the franc, Maher said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” withTom Keene on Aug. 2. “All the others are ‘ugh, that’s pretty grim.’”
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