Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Switzerland Under Siege, Free Markets May Yet Save the Swiss Franc

Currencies / Credit Crisis 2010 Jul 20, 2010 - 03:47 PM GMT

By: Axel_Merk


Best Financial Markets Analysis ArticleEfforts are underway to undermine Switzerland’s rock solid reputation as a safe haven. The alpine nation, famous for its readiness against enemies with citizens storing military assault rifles at their homes, is under attack. The attack, however, comes from one of their own, the guardian of the Swiss franc: the Swiss National Bank (SNB). In any other country, a central bank may have the power to derail the currency; in Switzerland, however, efforts to undermine the franc may be more appropriately characterized by a Don Quixotian battle by a lone warrior, a warrior armed with a license to print money.

Prices, be they for goods and services, stock prices or currencies, are best set by free markets. The euro and the Swiss franc are traditionally two highly correlated currencies; however, there are rational reasons why each currency has periods of strengths and weakness. SNB Chairman Philipp Hildebrand does not appear to see it that way; he was on a mission against “speculators” that gauged the Swiss franc to be a safer place than the euro. As his influence rose in early 2009 (his promotion from Vice President to Chairman was announced in early 2009, but did not take effect until early 2010), Switzerland began to intervene in the currency markets, apparently with the aim of pegging the Swiss franc to the euro. Below is a chart of the Swiss franc versus the euro over this time period (a rising trend reflects Swiss franc strength versus the euro); sharp moves downward tend to coincide with larger interventions to “punish” speculators:

As the Greek crisis intensified, it became ever more difficult for the SNB to achieve its goals. It appears to us that investors scared of any fallout from Greece were treated as enemy combatants for seeking refuge in the Swiss franc. It is mindboggling to brandish those diversifying from the euro to the Swiss franc as speculators. Without a doubt, the Greek tragedy made the euro appear riskier to rational investors. There’s a perception at the SNB that a strong Swiss franc versus the euro hurts Swiss exports – the SNB prefers to use the more dramatic and over-used term deflation. On the margin, that may well be true, but consider:

  • Switzerland’s strength has never been to compete on cost. Keeping a currency weak for competitive reasons is something stronger Asian countries may be in the process of relaxing because these policies may have caused inflationary pressures to build.
  • Swiss firms have extensive experience in dealing with fluctuating exchange rates, as well as a strong Swiss franc.
  • Swiss multi-nationals generally have foreign subsidiaries through which currency exposures of revenues and expenses can be more easily aligned.
  • Swiss watchmakers are complaining because of the high price of gold, not the strong Swiss franc. Indeed, a stronger Swiss franc would alleviate some of these additional cost pressures.
  • Most importantly, Swiss banks depend on the trust in the Swiss franc. It’s bad enough that Swiss bank secrecy has more holes than Swiss cheese. If the SNB were to succeed in actually weakening the Swiss franc in a meaningful way, the confidence loss in the banking industry may easily exceed the short-term benefit of boosting exports.

In early 2009, before the first interventions took place, we wondered how effective such a strategy could be. When Japanese policy makers make threats to intervene to weaken the yen, we take them very seriously; after all, the Japanese might be willing and able to destroy their currency in a possibly fruitless effort to boost their economy (see our January 2009 analysis Yen’s Kamikaze Flight Trajectory). But the Swiss? Would the SNB go all the way in their effort to weaken their currency? Our judgment has been that it is unlikely; history so far seems to prove us right. However, because of the disconnect between the talk and action, the Swiss National Bank’s policy is not fighting, but encouraging speculation. Each time the SNB intervenes to weaken the Swiss franc, it may be a gift to speculators, as they can buy the Swiss franc at a discount.

It’s not just cultural reasons why the SNB is unlikely to succeed on a “kamikaze mission”: Switzerland’s public finances are too sound to be easily wrecked by a rogue national bank. While Switzerland’s debt-to-GDP ratio is reasonably low by international standards, the country’s discipline slipped during the 1990s; during the period, the gross debt-to-GDP ratio (including federal, cantonal and communal debt) rose from 31 to 54 percent; during the same period, Ireland, Portugal, Belgium, Netherlands and Denmark all reduced their debt-to-GDP ratios (source: 2002 IMF Working Paper on Swiss Debt Brake). As Swiss debt-to-GDP ratios climbed, a movement in Switzerland was born that eventually led to a constitutional amendment that requires a balanced budget over a business cycle: the balanced budget amendment, commonly referred to as the Swiss Debt Brake, was passed in 2001 and implemented in 2003. Without going into the details of how the mechanism works, relevant for our discussion is that the will of the voters imposed fiscal discipline.

There is a very real consequence of a country living within its means: the debt market of that country is not very large. The Swiss debt market is a rather quiet one: investors often buy debt at auctions, then hold them to maturity; since the onset of the financial crisis, Swiss T-Bills have often been auctioned off at face value, meaning buyers get 0% interest for lending their money (or negative interest after commission). In such an environment, quantitative easing or credit easing is more easily said than done: the SNB cannot print money to buy Swiss debt on a grand scale as there are simply not enough sellers around. However, never underestimate the creativity of central bankers: if it is not realistic to buy Swiss franc denominated debt, why not use the Swiss central bank’s balance sheet, i.e. print money, to buy euro denominated debt? An intervention strategy was initiated that allowed Swiss-style quantitative easing, currency intervention, all in the name of fighting deflation and speculation.

Except, that the SNB gamble has not worked. As a result of buying euro, well, the Swiss National Bank’s balance sheet, now holds euro – lots of it; indeed, the SNB now holds significantly more euro than Swiss francs. The SNB may be running out of ammunition as it has a dwindling supply of Swiss francs; theoretically, that should not stop a central bank: indeed, the SNB can create Swiss francs out of thin air (a mere keyboard entry into its accounts) to buy euros. However, politically, it will be an uphill battle for the SNB to claim it is pursuing its Swiss mandate should they almost exclusively hold euros.

Unlike other central banks, the SNB is a publicly traded corporation with shareholders; the Swiss federal government is not a shareholder, but the cantons are; theoretically, anyone can buy shares, subject to availability. While the SNB’s corporate charter has certain special features, most importantly the power to print money, heavy foreign currency exposure may create wide swings in earnings; notably, the SNB may report losses in the billions as a result of its currency interventions (that may turn into substantial profits if and when the euro recovers). While even a negative net worth is mostly a technicality for a central bank, most damaging about such losses is the wrath of the public that may scrutinize the bank in more detail. Swiss citizens have shown that they can impose discipline on fiscal policy; they may very well rein in a SNB not fulfilling the will of the people.

So what is an investor, rather than speculator, to do? In a March 2009 op-ed published in the Financial Times, we cautioned Switzerland may cede its safe haven status to Norway. While we gauged at the time that the SNB’s policies would not lead to its desired long-term devaluation of the Swiss franc, we did anticipate a more negative investment climate for Switzerland as a result of the more activist central bank. We are on record for shifting substantial assets from Switzerland to Norway from early 2009. We started to reduce that position as the SNB’s position became increasingly untenable. Below is a chart of the Swiss franc versus the Norwegian krone (a downward trend reflects Swiss franc weakness relative to the Norwegian krone):

In our assessment, the biggest problem with central bank currency intervention is not whether it is effective or not, but that investors start focusing on possible intervention rather than underlying fundamentals. While this may not be the last fight the SNB puts up, it appears the markets have little confidence the SNB can implement its threats. Indeed, the SNB seems to have looked for a graceful exit to its policies by declaring the threat of inflation over, for the time being. Of course, that announcement spurred a speculative rally, giving the green light to buy Swiss francs. That in turn caused the SNB to state that they may intervene yet again; we would rather have the SNB focus on sound monetary policy than on a cat and mouse game with speculators they are bound to lose.

As policy makers are throwing around billions, if not trillions of dollars, in desperate attempts to enforce their objectives, rational capital allocation suffers, planting seeds for new distortions and bubbles.

In the coming days, the stress test on the eurozone banks will be published; don’t miss our analysis by signing up to our newsletter; we will also give an update on our views in our webinar on July 29, 2010 – please register.

We manage the Merk Absolute Return Currency Fund, the Merk Asian Currency Fund, and the Merk Hard Currency Fund; transparent no-load currency mutual funds that do not typically employ leverage. This analysis is a preview of our annual letter to investors; to learn more about the Funds, please visit

By Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds,

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


22 Jul 10, 02:46
Switzerland - Besieged by What?

Axel: What exactly is "rock solid" Switzerland besieged by if not its own stupidity? Compared to UBS, Herr Hildebrand is a small danger indeed. What exactly does one get when one buys a swiss franc? An option to backstop a bank that has been at the centre of every lending excess? I think the swiss should focus on these reckless institutions rather than besieging the American capital markets with claims of sainthood and a raft of gold penny stock promotions - they really are giving the Nigerians some serious competition in the scam department.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules