The Swiss get on the QE2

Apparently, the Swiss franc is too high — or so says the Swiss central bank.  As a result, they are selling francs in the foreign exchange market to get the franc to come down.  There has been a lot of speculation about the Swiss and their plans to devalue the Swiss franc, including on this site.  It now seems clear that devaluation is where things are headed. Quantitative easing (QE) may be next.   On Feb 19th, I said as much:

The Swiss are not a member of the Eurozone. They are not even a member of the EU. Like Norway (and Iceland, for that matter), the Swiss are on their own. This has benefits. The Impossible Trinity is a non-sequitur. One can print money and devalue at the heart’s content. The Brits have shown us the power of devaluing a currency from 2.11 per U.S. Dollar to 1.43 per U.S. Dollar. Surely, the Swiss can do the same. In fact, in the case of the Swiss, devaluation would mean that their debtors will be able to repay their loans more easily. I fully expect the Swiss National Bank understands this and is prepared to crank up the presses if they have not begun to do so already.

Just the other day, the Brits started quantitative easing a.k.a. printing money — joining the Americans and the Japanese in plucking bills off the money tree at the central bank.

Who’s next to get on the QE2 – its a lovely ship?  Why, Switzerland, of course.

The Swiss franc plunged to its lowest level so far this year on Thursday after the Swiss National Bank said it was set to make purchases in the foreign exchange market to halt the currency’s rise against the euro.

The Swiss franc’s haven status has been heightened by the recent market turmoil and seen it rise 9 per cent on a trade-weighted basis since July and come close to its record high around SFr1.43 against the euro in recent weeks.

The SNB said the Swiss franc’s strength represented an “inappropriate tightening of monetary conditions” as it battled against a sharp deterioration in the Swiss economy.

“In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro,” the central bank said.

The central bank said it had implemented its decision, with traders confirming that the SNB had been active in the market.

This represented the first time a major central bank has intervened in the foreign exchange markets since 2004 when the Bank of Japan sought to weaken the yen.

The Swiss franc dropped 3.2 per cent to SFr1.5290 against the euro and dropped 3.7 per cent to $1.1952 against the dollar.

Marc Chandler at Brown Brothers Harriman said even though the SNB’s intervention to weaken the franc was enjoying immediate success, the policy’s longer term prospects were more questionable.

But do the Swiss have any choice? The Swiss are going to do QE too.

“The SNB is certainly next in line for such moves,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “The SNB probably needs to do more. It’s game over for conventional monetary policy.”


Originally published at Credit Writedowns and reproduced here with the author’s permission.