Two weeks ago Switzerland abruptly decided that it couldn't keep buying billions
of euros every month just to maintain a somewhat arbitrary peg with that
currency. It stopped trying, allowed the Swiss franc to trade according to
market forces, and watched it soar.
At the time there was some question about whether an export-centric economy
like Switzerland could handle a soaring currency's impact on its major industries.
In other words, is
it even possible to surrender in a currency war?
This week we got an answer. At least for Switzerland, it is not possible.
From Bloomberg:
Switzerland
Rejoins Currency Wars
Two weeks after Switzerland stunned currency traders by abandoning the
franc's peg to the euro, it seems that the central bank is quietly getting
back in the market. With central banks from Denmark to Singapore to Canada
easing monetary policy in recent weeks, the Swiss authorities face an
even bigger battle trying to restrain their strengthening currency.
The Schweiz am Sonntag newspaper said during the weekend that the Swiss
National Bank is now targeting a corridor rate for the franc of 1.05
to 1.10 per euro, compared with the 1.20 level it abandoned Jan. 15.
The bank is declining to comment; but if it is trying to keep the franc
from becoming stronger than that level against the euro, it seems to
be struggling to drive the currency into the desired range:
The aftershocks of the peg abandonment, which triggered squeals of horror
from Swiss exporters, are still rumbling through the nation's economy.
Figures released yesterday showed that a benchmark index of manufacturing
activity slumped to 48.2 in January, down from 53.6 a month earlier and
undershooting economists' expectations for a 50.6 reading. A number below
50 signals contraction, and every component from order pipelines to stocks
of goods to employment declined. The manufacturing survey was taken just
after the currency defense was abandoned, according to Martina von Terzi,
an economist at Unicredit in Munich. She expects the Swiss economy to
grow by just 0.1 percent this year, with quarter-on-quarter contractions
of 0.7 percent in the first three months and 0.3 percent in the second.
So it's clear why Switzerland doesn't want an appreciating currency to
trash its economy.
Having retired once with a bloody nose, however, it isn't clear why the
Swiss central bank thinks it can rejoin the fray without taking another
beating. Maybe it hopes that the currency traders who lost millions of
dollars when the peg was dropped won't dare to speculate again on the
franc. Maybe it considers 1.05 francs per euro defensible in a way that
the old peg of 1.20 wasn't. Maybe it anticipates less pressure now that
the European Central Bank has finally conceded to the need for quantitative
easing.
Bloomberg nails the two main points here. First, allowing one's currency to
soar is the same thing as importing the rest of the world's deflation. As
a consequence, your exports plunge, manufacturing slows, the economy dips
into recession and leaders get tossed out in the next election.
Second, keeping a currency weak enough to be "stable" in an aggressively devaluing
world depends, in part, on the markets believing that you'll follow through.
Everyone is pretty certain that the eurozone and Japan, for instance, are
going to flood the world with their currencies in 2015, regardless of the
consequences. But the Swiss, having burned foreign exchange traders big-time
just two weeks ago, have a lot less inflationary credibility. So now, as
they try to maintain their new peg (calling it a "corridor" doesn't change
the reality of the policy), foreign exchange traders are happily buying up
all the new francs that the Swiss National Bank creates, assuming the same
pressures that caused the last surrender will cause the next one. They're
probably right, making the franc a really good bet for another 20% pop in
the year ahead.
So now the question becomes, once you've tried to surrender in a currency
war, is it possible to rejoin the fray? We'll see. Either way, the Swiss
are earning their own chapter in future economics textbooks.
