The Swiss franc tests all-time highs against the euro
The Swiss franc is testing all-time highs against the euro. How do Swiss companies survive if the currency keeps getting stronger and stronger?
This is what happens:
* They benefit from lower import costs compared to their 450 million EU neighbors. All internationally traded goods and services priced in euros or US dollars just get cheaper and cheaper in Swiss francs: commodities, Google ads, computers, LinkedIn subscriptions, cloud services…cheaper and cheaper.
* They benefit from much lower inflation, which also means that their employees receive smaller wage increases (recent wage increases: +6.6% in Germany vs. +1.8% in Switzerland).
* Lower inflation means lower interest rates, so Swiss companies have a lower cost of capital and the government has lower payment costs.
* Their taxes are lower: They tell their government that if they don’t keep taxes lower than their competitors, they will go bankrupt. So they impose a strict spending limit on their government
*They must offer products that require a higher price (e.g. the engine for the Mars rover explorer was made in Switzerland and NASA pays for it in dollars).
*They are constantly looking for ways to improve efficiency because they know they will be paid in an ever-depreciating foreign currency.
Summary: It works.
One way for this trade to unwind is if the central bank were to convince markets that it will generate inflation equal to or higher than in the euro area. But this is unlikely, so we should expect the appreciating trend of the Swiss franc to continue. It has over the last two centuries in relation to:
The US dollar
Source:Vikingen.se
The British pound
Source:Vikingen.se
The Japanese yen
Source:Vikingen.se
[Technical note: The chart shows end of date spot prices, which is why we don’t see flash crashes during the day].
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