(emphasis mine) [my comment]

Swiss franc looking vulnerable
By Peter Garnham, Financial Times, 11 Mar 2009

The Swiss franc could be undermined if the Swiss National Bank decides to use the currency as a tool to stimulate the country's economy after its policy meeting on Thursday.

With its three-month interest rate target range already at 0 to 0.5 per cent, the SNB has limited room for manoeuvre on interest rates. It may therefore decide that a weaker Swiss franc is the best method to enact further monetary easing.

The haven appeal of the Swiss franc has been heightened by the recent market turmoil, taking it up towards the record high of SFr1.43 it hit against the euro in October last year. Currently it stands at SFr1.4780 against the single currency.

Further currency strength — on a trade-weighted basis the Swiss franc has risen 9 per cent since July — would act as monetary tightening, the opposite effect that the SNB is trying to create.

Mansoor Mohi-uddin at UBS says a dovish SNB could tackle the twin challenges of deflation and a cripplingly strong currency by deciding to buy foreign bonds. [This would be a terrible decision.] "This would require it to print money — quantitative easing — so helping to ward off deflationary risks in the economy," he says.

"In addition, the intervention in currency markets to purchase foreign currency bonds would help introduce two-way risk back into the euro/Swiss franc exchange rate."

Mr Mohi-uddin says if the notion sounds far fetched [Yes, it does, because the Swiss would have to be insane to do it.], then it is important to remember that the Swiss bond market is simply not large enough to support domestic quantitative easing. Last week in the UK, the Bank of England, similarly faced with low interest rates, decided to buy domestic UK gilts to expand the money supply.

The Bank intends to purchase up to £75bn ($103bn) worth of UK government bonds over the next three months. Overall, it is allowed to buy up to £100bn in gilts and up to £50bn in corporate assets.

But it has the scope to do this as the UK economy last year had £800bn worth of domestic bonds outstanding of which over £500bn were gilts according to the BIS.

In contrast Swiss outstanding domestic bonds stood at SFr267bn ($230.4bn) with public sector bonds only about SFr125bn. Moreover analysts say the amount of Swiss government bonds available to trade is very low. Analysts say the problem with selling the Swiss franc is that the SNB would be accused of beggar-thy-neighbour devaluation at a time when many countries could benefit from weaker exchange rates.

Steve Barrow at Standard Bank says the fact that Switzerland is not part of the G7 or G20 might give it some leeway in this regard.

"However, with the G20 already on Switzerland's back over bank secrecy, a competitive devaluation by the Swiss would not go down too well," he says.

"This is something the SNB will have to think about, even if the consequence would seem to be even more treasured Swiss franc depreciation."

Mr Barrow believes Switzerland is likely to revert to the course of action it followed when the Swiss economy was last in trouble in 2003/04. Then, the SNB cut interest rates and intervened verbally to weaken the Swiss franc, threatening unsterilised intervention.

"If this does not work, and we are sceptical that it will, actual intervention may be required and we suspect this will have some impact," says Mr Barrow. "The bottom line is that the franc looks vulnerable."

My reaction: Eighteen years ago, I used to live in Switzerland. So I am upset that flawed Keynesian thinking has infected the Swiss National Bank. The possible decision to expand Switzerland's money supply by buying soon-to-be worthless foreign bonds (ie: US treasuries) would be a squandering of national wealth equaled only by Switzerland's recent gold sales.

Switzerland's 2000-2007 gold sales

In 1999, some brilliant Swiss central banker described "gold as a relic" and proceeded to sell off over half Switzerland's gold reserves over the next seven years. Here are two graphs that show how wise this brilliant central banker was:




The price of gold since 2000:



These recent sales of Swiss gold can only be described as a "squandering of Switzerland's national wealth".


Despite the SNB, the Swiss franc will be a survivor of this financial crisis

Make no mistake; Swiss franc is not the US dollar or British pound. Switzerland has:

A strong manufacturing sector and has been running trade surpluses.
A positive net international investment position (it is a creditor nation).
One of the largest gold reserves (the highest gold backing of any nation outside Venezuela.)

The Swiss franc is one of the few currencies I expect to survive this financial crisis without adding 000s to its paper bills. However, because of the actions of the Swiss National Bank, they might have to one 0 to the Swiss franc.

Swiss franc and gold

I do recommend holding gold instead of Swiss francs until the SNB intentions are clearer. Also, it is important to realize that, no matter what the SNB does, the Swiss franc will outperform the dollar and that gold held in Switzerland is safe.