Those Poor Swiss Victims of Currency War (Really)

♠ Posted by Emmanuel in , at 11/05/2010 12:05:00 AM
[It seems we've largely overlooked a sleeper of an international currency warrior, but I'm blowing its cover Scooter Libby-style right here, right now.] I've just come from an interesting talk here at the LSE featuring IMF Chief Economist Olivier Blanchard simply entitled "The State of the World Economy." Not being a particularly big fan of Blanchard--and his somewhat odd reminiscing about his time at the LSE with one Larry Summers didn't help--the subject matter was at least intriguing. Among other things, even Blanchard sees a role for capital controls once inflows reach inflation-threatening thresholds. One of the most obvious bits that I looked forward to was discussion of "international currency war" being waged by the United States on all and sundry.

We all know who the most prominent complainers are since their complaints are loud and clear--Brazil, China, and so forth. However, Blanchard reminded all of us that the Swiss are also actively trying to manage their exchange rate. Not only do they fear a decline of export competitiveness, but they also have to deal with "organic" inflows as a consequence of being an international centre of finance. A few months ago, I featured Swiss foreign exchange intervention that was increasing in light of EUR/CHF slumping since its largest trading partner is the EU. As it turns out, the magnitude of Swiss action deserves more mention than we previously thought. Which, of course, is odd since (a) Switzerland is no Johnny-come-lately to industrialization, (b) we haven't heard much about it intervening, and (c) the Swiss franc is a reserve currency in its own right. Chalk this one up to keeping your trap shut and avoiding others' ire in the process. Also chalk it up to long Swiss experience managing money discreetly. Some things never change.

Anyway, Reuters has these bullet points to offer. Let's just say the Swiss aren't too happy with the current state of affairs. What's more, Swiss National Bank actions with respect to re-entering the FX markets are contingent on what Japan will do:
  • Cenbank spent nearly 200 billion Swiss francs via interventions from March 2009
  • Interventions stopped in June of this year
  • Traders speculate Japan move could prompt SNB to resume intervention
  • Swiss franc flirting with parity against dollar
On the first point, we arrive at the chart above plotting Swiss foreign exchange reserve data courtesy of the IMF for the period starting March 2009 (when it had about $80B in reserves) to June 2010 (when it had $255B)-- when the SNB was actively selling Swiss francs. It's pretty remarkable how more than tripling its stash in little over a year has gone quietly, but there it is. With the US set to go on the offensive again, who's to say that the Swiss will stand pat? And let loose the hush puppies [shhh] of international currency war.