The Swiss franc reached its highest level since April 2017 after the US added Switzerland to a watchlist of countries it has accused of currency manipulation at the expense of the USA according to the Financial Times.

It is not the first time that the Swiss National Bank (SNB) intervenes in the currency market in order to perform competitive devaluations. It has already done it in 2015 and in 2018, at that moment the SNB started a currency war. The SNB is the unique Central Bank among its G10 peers to use intervention as a policy tool and holds about $800 bn in foreign currency for that purpose according to the Financial Times.

The euro sank to 1.07 Swiss franc on the 24th of January 2020. Against the dollar, the franc reached its strongest value since September 2018 (USD/CHF=0.97) after having reached a parity of 1USD=1CHF in November 2019 according to Boursorama.

Because of this caveat, the SNB should less intervene and accept its currency to rise up. The reason is that it has now a limited ability to manipulate the franc. However, the SNB will not stay inactive since intervention is one of its most important historical tools, notably against deflation. It might prioritise a decrease in interest rates in order to improve the diplomatic and economic relationships with the US since direct currency intervention is diplomatically sensitive.

Therefore, the president of the SNB, Thomas Jordan, mentioned in an interview for Bloomberg that the Central Bank is not trying to weaken the franc to obtain a competitive advantage over any country but is rather trying to avoid the franc to be too strong and to lead to deflation. He characterises the policy as a defensive one rather than an offensive one.

It seems that the intention of the SNB to avoid deflation and to manipulate the franc is still on the agenda despite the US caveat. The SNB might have just found another tool to exercise its actions, a tool that is more diplomatically acceptable. 

Marko Stanic

Marko Stanic

Vice President

Focus on Markets.