While Switzerland may serve as a beacon of stability and safety after a track-record that stretches for centuries, it does not mean the nation’s economy does not face risks. The Swiss National Bank was keen to maintain the weakness in the Franc for years to protect the domestic export economy until hot-money inflows trying to escape risks abroad forced the central bank to abandon its exchange rate targets. Besides targeting exchange rates through actual interventions, the Central Bank shifted to dropping interest rates into negative territory in an effort to punish those savers that tried to benefit from the perceived safety of Swiss assets. However, this plan has spectacularly backfired with the Franc continuing to appreciate against certain international peers considering the mixed outlook for the global economy. The rise in Franc has also created other problems for policymakers as the appreciation hurts the export economy, seeing quarterly GDP growth print in negative territory this morning as annualized growth decelerates.
Hurting the outlook for the Swiss economy is the debacle unfolding in the neighboring Euro Area as a rapid descent in the Euro has left investors scrambling to protect principal and maintain wealth. Even parking money in Switzerland is a losing scenario considering the negative interest rate policies, investors much prefer the idea of protecting wealth and paying for this protection than growing assets and taking on risk. Moreover, Switzerland even has the confidence of Central Banks after it was revealed that Austria plans to repatriate most of its gold, with efforts to hold 50% domestically while moving a substantial amount into Switzerland. This is another sign of growing confidence in the Swiss reputation despite the near-term costs. Even though the indications for the economy are not positive on a medium-term basis owing to external factors, in the grand scheme of Swiss history, this is a blip on the radar that will likely benefit the country’s longer-term status as a refuge and haven for asset protection.
Swiss GDP Tumbles
Market Trends - 29/05/2015