The Swiss central bank has cut rates to reverse the rise of its currency, writes Eric Johnston.
Fearing their economies could be crippled by some of the world's floundering power currencies, Switzerland and Japan are taking matters into their own hands.
The Japanese government intervened in currency markets yesterday to curb the rise of the yen against the US dollar. This rally has threatened to hurt Japanese exporters, many of which remain vulnerable after the tsunami and earthquake this year.
The move came just hours after the Swiss central bank unexpectedly cut interest rates a quarter of a percentage point to zero to reverse the steady rise of the franc, which is regarded as a safe haven for investors amid Europe's economic turmoil.
Some say there is a case to be mounted in Australia as exporters from manufacturing and tourism to education are increasingly finding themselves being priced out of reach from their main customers with the Australian dollar persisting over $US1 for most of this year.
"The Swiss and Japanese are very cognisant with the damage not just in the short term but in the long term from currency appreciation that they have very little control over," said Heather Ridout, chief executive of the Australian Industry Group. "They're putting in strategies to deal with it.
"In Australia's case we don't have a strategy. We have been calling for a plan to deal with the impact on major employment sectors such as manufacturing that are on the sharp end of these large currency appreciations."
The Swiss central bank declared the currency "massively overvalued" against the US dollar and euro. Fearful of the impact on economic growth, it used the rate cut to discourage investors from holding Swiss francs.
The franc retreated slightly, but not enough to ease the fears of such exporters as watchmakers, engineers and ski field operators.
Protected by mountains and lakes from the rest of Europe's economic woes, Switzerland is in pristine health compared with its neighbours. It has a large current account surplus, net debt is running at 38 per cent of gross domestic product, the economy grew at 2.6 per cent last year, and unemployment is low.
The Swiss franc is up more than 23 per cent against the US dollar over the past six months, and up 36 per cent on the year.
The euro has fared little better against the franc. After Greek woes, investors are sweating over Italy and Spain, causing skittish investors to move more funds into the franc.
Japanese authorities moved to protect their economy by selling yen and buying US dollars to cool their currency. Japan's Finance Minister, Yoshihiko Noda, said the move was aimed at countering "excessive" rises in the yen. This is hurting Japanese exporters, making cars and electronic goods more expensive. Against the US dollar, the yen has surged about 10 per cent in the past year, and 4 per cent in the past month.
Helped by high interest rates, low government debt and solid economic growth, the Australian dollar has risen over 17 per cent over the past year, posting the third highest gains over the US dollar among the world's key currencies.
Only the Swiss franc and the New Zealand dollar have risen faster than the Australian dollar. This week New Zealand's Finance Minister, Bill English, said the currency had reached levels no one could anticipate and New Zealand would prefer a lower exchange rate.
Over the past decade the Australian dollar is up a blistering 107 per cent against the US dollar, coming a narrow second behind the Swiss franc, which is up over 120 per cent on the decade.
The Australian pharmaceutical major CSL will feel this, an analyst said.
"CSL has a major production facility in Switzerland and the strong Swiss franc means that export product from this facility will now likely land in the US at a higher cost base," said a Goldman Sachs healthcare analyst, Ian Abbott.
This rise in the Swiss currency is likely to create a "material headwind" for CSL's profit this year, he said.
Frequently Asked Questions about this Article…
What did the Swiss central bank do to cool the Swiss franc and why?
The Swiss central bank unexpectedly cut interest rates by a quarter of a percentage point to zero to try to reverse the franc’s steady rise. The bank called the currency “massively overvalued” against the US dollar and euro and used the rate cut to discourage investors from holding francs, fearing the strong franc would hurt economic growth and exporters.
How big has the Swiss franc’s recent appreciation been against the US dollar?
According to the article, the Swiss franc has risen more than 23% against the US dollar over the past six months and about 36% over the past year. Over the past decade the franc has climbed by more than 120% versus the US dollar.
Why are Switzerland and Japan intervening in currency markets?
Both countries are acting because their currencies have strengthened sharply, which can damage exporters and broader economic growth. The Swiss cut rates to discourage safe-haven inflows into francs; Japan intervened by selling yen and buying US dollars to counter what its finance minister called “excessive” yen gains that were hurting exporters.
How did Japan try to slow the yen’s rise and what was the impact?
Japanese authorities sold yen and bought US dollars to cool the currency. The article notes the yen surged about 10% against the US dollar over the past year and roughly 4% in the past month, moves that made Japanese cars and electronic goods more expensive for overseas buyers.
What does a stronger Swiss franc mean for companies like CSL and other exporters?
A stronger Swiss franc raises the overseas price base of goods produced in Switzerland. The article cites a Goldman Sachs analyst saying CSL—an Australian pharmaceutical major with a major production facility in Switzerland—will likely face higher costs for exports priced in US dollars, creating a “material headwind” for CSL’s profits this year.
How has the Australian dollar performed and why might that worry Australian exporters?
The Australian dollar has risen over 17% in the past year—helped by high interest rates, low government debt and solid growth—and is up about 107% against the US dollar over the past decade. The article says this persistent strength is pricing some Australian exporters (from manufacturing and tourism to education) out of key markets, and industry groups have called for a plan to deal with the impact.
What does ‘safe-haven’ currency mean and how does it affect investors?
A ‘safe-haven’ currency draws investor money during global risk or regional economic turmoil—investors move funds into it to protect value. The article notes the franc is seen as a safe haven amid Europe’s turmoil, which has boosted demand and driven appreciation that can hurt exporters and corporate profits in countries where companies have costs or production in that currency.
What should everyday investors watch when central banks intervene or currencies move sharply?
Based on the article, investors should watch central bank actions (like the Swiss rate cut or Japanese market intervention), magnitude and speed of currency moves, and company exposure to affected currencies. For example, firms with production in Switzerland (such as CSL) may face cost and profit pressures when the franc strengthens. Monitoring currency trends can help investors understand potential headwinds for exporters and earnings.
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