25.09.2012 – Peter Lavelle at foreign exchange broker Pure FX
You may know that twelve months ago, in September 2011, the #swiss National Bank set a minimum exchange rate of 1.00 #euro to 1.20 francs. This means the euro to franc exchange rate can never fall beneath 1.20, although it can rise. The idea was to prevent the franc becoming too expensive, which would have been damaging to #switzerland’s export industry, which comprises 54.0% of Gross National Product.
Since September 2011 then, the euro to franc exchange rate has stuck at 1.20 through thick and thin. Yet recently, there’s been signs of the #franc weakening, as the Eurozone #debt #crisis abates. Is this likely to happen, and what would it mean for you if it did?
Two weeks ago, the Swiss franc did something almost unprecedented in the past 12 months. It fell against the euro, slipping from the 1.20 minimum imposed by the Swiss National Bank to 1.22. That means for each 1.00 euro you sold, you would no longer get 1.20 francs, but 1.22 francs, making the Swiss #currency cheaper. The decline didn’t last long, and today the franc again finds itself nailed at that 1.20 point. But what caused this move? Could it happen again?
European Central Bank intervention
The franc fell because of the European Central Bank’s announcement of its bond buying scheme, the single biggest landmark in the debt crisis since it began in 2009. Called Official Monetary Transactions, this reflected ECB President Mario Draghi’s will to “preserve the euro whatever it takes,” and convince financial markets the common currency is “irreversible.” It involves buying Spanish and Italian government bonds, to keep borrowing costs from getting too high.
The franc fell on this announcement because, until then, there had been a total dearth of initiatives intended to convince investors the euro was permanent. Suddenly, Mr. Draghi was promising to spend unlimited sums to keep the euro in place. That gave the financial markets a reason to buy the euro, and sell the Swiss franc, for the first #time in three years.
Is this change permanent?
So could this signal the franc is about to weaken permanently against the euro? Speaking recently, Swiss National Bank chairman Thomas Jordan express skepticism at this idea. Asked if the Eurozone had reached a turning point, he said “Unfortunately, it’s probably still too early to tell whether this is in fact the case or not.” Given that, the Swiss National Bank intends to maintain its policy of defending the minimum exchange rate.
And what does this mean for you? Well, if the Swiss franc falls that’s beneficial if you intend to emigrate to Switzerland, because it makes Swiss property (and other items) cheaper. If the franc is at 1.30 against the euro instead of 1.20 for instance, that means you need far fewer euros to reach the Swiss franc total needed to buy your property. Unfortunately though, if the SNB intends to maintain the minimum rate, that probably means the franc isn’t set to weaken in the short term.