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Switzerland: Is the SNB Being Franc?
- The SNB is under increasing pressure to defend its foreign exchange target of at least 1.20 against the euro.
- Eurozone tensions have finally begun to take their toll on the euro. As a result, the SNB was forced to buy about SFr 60 bln of FX in each of the last two months. Swiss FX reserves have pushed the SNB balance sheet to 60% of GDP possibly creating future risks.
- The main issue is that the SNB has two targets (inflation and the exchange rate) but only one policy tool Although both targets support accommodation, the question is whether the SNB should keep capping its currency.
- While a stronger SFr does hurt Swiss competitiveness abroad (export sensitivity), Switzerland actually has a greater import sensitivity to the euro with 75% of Swiss imports coming from the Eurozone. So a strong currency is boosting consumer spending power and appears to be making the economy more resilient—only further boosting the safe-haven status and pushing up the SFr.