The swiss franc became ~20% stronger in January 2015, when the swiss national bank removed the 1.20 cap. Ever since, the SNB has consistently been saying that the franc is overvalued, and has made efforts to weaken it. Last week, after 2.5 years, it lost much of its strength, trading at about 1.13 for each euro.

However, when I look at Switzerland's exports and overall trade balance, it has done pretty well. I don't see almost any effect of a stronger currency weighing on trade. If anything, the trade balance has been slowly increasing these few years (meaning more exports than imports). Inflation also started to increase all through 2016.

So why would the SNB still say last Thursday that the franc is significantly overvalued? Am I missing some other variable in this equation?

closed as off-topic by Dheer, MD-Tech, Nathan L, JoeTaxpayer Jul 31 '17 at 16:02

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What if I told you that the Swiss National Bank simply likes diluting their currency so they can buy more things for free. They are basically the largest hedge fund in the world and like to buy US stocks. Therefore they tell everyone their currency is too strong, and as long as their geopolitical situation is still favorable enough to people that want to buy enough of their currency, then they can keep issuing more of their currency (via new government bonds), and using the proceeds to buy more stuff for free.

Profits from the SNB portfolio are distributed to the cantons (states) and people of Switzerland.

They are a sovereign institution and these are the potential conflicts that can hamper an objective analysis. As clearly they are able to manage their trade imbalances so far no matter what the exchange rate does.

This isn't a criticism, but if they were required to put a tiny disclaimer after all of their financial analysis, that is what it would say.

  • So just to make sure I understood: They want to weaken their currency, so more people will buy their currency (through government bonds), thus providing them with more money. But their bond yields are negative up to the 5 year duration at least, why wouldn't someone buy US bonds instead? Edit: European bonds even have higher yield currently. Of course they are more expensive currency wise. – Jason Jul 30 '17 at 17:56
  • @jason many people do buy US bonds, thats why US bonds are at or near their lowest yield ever too despite bucking the trend and attempting to raise interest rates. Switzerland has a unique geopolitical situation, a unique structure in its confederacy, and also maintains several favorable trade agreements with the Euro area. The simple answer is that "everywhere else is worse" while an ever increasing amount of currency is floating around. Each central bank that is interested in lower rates will simply gauge the market, determines what the tolerance is, and try to sell more govt bonds. – CQM Jul 30 '17 at 18:07

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