Switzerland is being held captive by its big neighbour

Switzerland is one of the richest places on the planet but it isn’t all sunshine and alpine flowers when you’re encircled by the world’s biggest trading bloc: the European Union. While the Swiss are pretty nimble in managing this unfortunate state of affairs, there are limits to what they can do.
Take currency. The Swiss National Bank is facing the perennial dilemma of an over-strong franc stifling its export-led economy, leading to a halving of growth over the past year. Instability in some emerging markets and Italy, as well as fears about a global trade war and a euro area recession, have encouraged investors to pile into the haven of the Swiss franc, which is trading as its strongest level in more than two years.
The SNB is widely believed to have been intervening to weaken its currency; the tell-tale sign being that so-called “sight deposits” have risen at the central bank. This is the cash commercial banks hold there, which economists consider an early indicator of SNB moves in foreign exchange markets. But it’s all been to no avail as the franc has carried on strengthening against the euro.
The problem for Switzerland is that its room for maneuver is so limited by its euro zone neighbours. With the European Central Bank’s rate set at -0.4 percent, the SNB’s is at -0.75 percent to try to deter FX investors attracted by its more alluring haven status. And with the markets expecting another cut from Mario Draghi’s ECB in September, people are preparing themselves for a fresh reduction from the Swiss central bank to maintain the buffer.
Both for the ECB and the Swiss the priority is stopping their currencies from rising and hurting exporters. It’s just that Bern, unlike Frankfurt, is a price-taker not a price-maker.
The SNB may even have to lower its official deposit to below -1 percent to dissuade those safe haven flows. It might also implement other smart measures such as stepping up its highly successful policy of purchasing overseas equities with its burgeoning foreign currency reserves.
At least the Swiss are better at using the element of surprise than most central banks. They haven’t taken policy action at a formal meeting for a decade — instead choosing the best moment.
Even Swiss corporate bonds don’t yield much. Nestle SA, the food group, won the dubious honour of becoming the first company whose 10-year debt in euros fell below zero yield.
This is all bad news for Switzerland’s legions of savers and for its huge private banking industry, which has started charging wealthy customers for their deposits. Reacting ahead of time to more ECB easing may soften the blow but it doesn’t alter the reality that the currency game is weighted heavily against the EU’s closest neighbours. Central bank rate shifts and currency wars have casualties. Size matters.

—Bloomberg