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SNB CHF Blog: A beleaguered central bank in the dangerous world of global macro and euro crisis

SNB CHF Blog: An economic encyclopedia on the Swiss safe-haven and its central bank written by an association of independent financial advisers.

Swiss Price Inflation: CPI 0.2% y/y, Swiss HICP: +0.2% y/y  Money inflation (M3) 7.7% y/y
Other HICPs Y/Y: Eurozone 1.1 0.9%, 0.7%, 0.5%   France: 1.0 0.8% 0.8%,  Italy: 1.2 0.8 0.7%, 0.5% 0.4%, Spain: 0.5 0.3%, 0.2%, 0.0%, 0.2%, Germany:1.4% 1.3% 1.2%1.1%0.6% (sources inflation.eu,  Eurostat and investing.com)


Our Core Thesis: European leaders have successfully implemented austerity, disallowed notorious wage increases in the periphery and nearly introduced deflation. Inflation differences between the euro zone and Switzerland will decrease to zero, Swiss CPI inflation might even be higher in some years. The CHF real eff. FX rate overvaluation talk disregards completely the continuous immigration into Switzerland. Therefore EUR/CHF will remain close to 1.20. Risk-off flows will not leave Switzerland, but they will be converted into risk-on flows (stocks and real estate) thanks to immigration, higher Swiss GDP growth and relatively weak Swiss wage hikes. In particular, in the housing sector these flows will build up wrong resource allocations. In some years stronger global growth and high German wage increases will boost inflation in Germany and partially in Switzerland but Southern Europe will still struggle. By tradition, Germans will move funds into Switzerland in order to protect them from inflation and the ECB. At that moment the SNB will need to hike interest rates - before or in line with the ECB. The Swiss "Soros moment" will arrive and the EUR/CHF will fall under 1.20. The consequence for monetary policy will be:
  1. Either the SNB fights inflation and the Swiss real estate bubble, allows a CHF appreciation and sells reserves below the price of EUR/CHF 1.20 or
  2. Switzerland accepts higher inflation and consequently gives up its competitive advantage in lower inflation and lower borrowing rates. The latter scenario was excluded by the SNB's Thomas Jordan already in 1999 when he pledged against a euro membership. The SNB mandate explicitly disallows inflation.
The first scenario, namely that the SNB sells reserves below EUR/CHF 1.20 is therefore the only feasible solution. Whether the SNB suffers a big loss depends on the income it can generate in the meantime. In regular posts we show how the Swiss CPI comes closer and closer to euro zone inflation. One day, maybe in 10 or 20 years, the Swiss franc will depreciate more strongly, but this will be only after the bust of the Swiss real estate bubble.


Permanent link to this article: http://snbchf.com/

2014 07 17

Is @spainbuca (Carlos) Reliable?

  UPDATE July 21st: Russia claims that Ukrainian fighter jets were close to MH17. This is in line with @spainbuca ‘s suggestion that fighters were “escorting” the MH17 shortly before it disappeared. For readers not knowing the details see the background here. Essentially Carlos claimed that the MH17 was first escorted and then shot down …

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Malaysian MH17: Ukrainian&Western Propaganda against Russian Propaganda. Who is Best?

strong suspicion that Ukrainian air control deliberately facilitated and enabled the shot-down. Combining Western and Ukrainian propaganda with pro-Russian propaganda helps. In each piece of “manufactured or exaggerated news” there might be a bit of truth. Still there is only one party to this conflict that has to gain from a deliberate blowing up of MH17, this is not Russia or the so-called “Donezk People’s Republic”.

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FX Rates and the Misleading Concept Called GDP

GDP is (or has become) a measurement of activity and consumption but not of capital accumulation and production.
In many cases, GDP is negatively correlated to savings. Higher savings (aka austerity) lead to lower GDP today, but higher GDP in the future.
In its worst case, GDP growth could be completely based on credit, eliminating the capital basis of a country (example Greece).
Western countries saw rising housing investments based on more credit. These investments, however, do not lead to increased production, while the credit may destroy the capital base.

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Will the Dollar Appreciate on higher U.S. Savings and a Smaller Trade Deficit?

In summer 2013, even the sceptical and “gold-friendly” economist John Mauldin followed the mainstream thinking that fracking and other technology could reduce OPEC’s and the Chinese advantage in global trade and reduce the U.S. trade deficit. Recently both claims got refuted: the first with WTI crude oil prices rising to nearly 108$ despite enhanced supply. Detailed data showed that rising U.S. industrial production was not caused by more manufacturing but by mining and the oil industry. We think that any way the U.S. current account deficit could effectively shrink. The reason, however, is that the savings rate of Americans could rise further and the balance sheet recession continue. Traditionally currencies appreciate with higher savings (in local currency) and depreciate with more spending.

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Inflation Expectations Drive Fed

Inflation Expectations = Real GDP Growth = Ten-Year Treasury Yields – 0.5%?

In most periods, inflation expectations and wages remain the main drivers of US bond yields. Inflation and its early indicators like money supply or inflation expectation surveys are the main determinants of the Fed’s behaviour. The inflation expectation surveys are often closely related to wages.   Expected wages are often met in the reality after …

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SNB Monetary Assessment June 2013

SNB, Swiss Economy, Negative Rates and More

Before the upcoming SNB monetary policy assessment meeting on June 19th, rumors started the SNB could follow the ECB and set negative rates on banks’ excess reserves. We would like to deliver the whole background, starting with the question why Swiss inflation has been so low in the past and why CHF always appreciated. 1) …

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The Swiss Radical Libertarian Party “UP Schweiz” Is Born

On June 18th, 2014, the new radical libertarian party UP!, “Unabhängigkeitspartei”, Independent Party was founded. The party is co-lead by the former head of the  Swiss young liberals, Brenda Mäder, the former head of the young liberals St. Gallen Simon Scherrer and by Silvan Amberg, the former leader of FDP’s homosexual association. The Swiss FDP is losing some of their brightest …

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Swiss CPI vs. Euro zone July 2013

Inflation Difference between Eurozone and Switzerland Narrows to 0.3%

According to Swiss Statistics the inflation rate has risen to 0.2% y/y – as for both the Swiss CPI standard and the European HICP standard. Given that the euro zone HICP is now at 0.5%, this implies that Swiss inflation is only 0.3% behind the one in the euro zone. Still in February 2012, the difference was 3.7%.   …

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Bundesbank Balance Sheet  2011

Do You Know Where German Excess Reserves and TARGET2 Claims Are Lying? Under German Mattresses!

We explain that German banks had already removed most excess liquidity before the ECB meeting, and they will continue to do so. Hence hardly any German bank will pay negative rates after the recent ECB decisions. Most parts of the German TARGET2 surplus and banks’ excess reserves are already lying as cash under German mattresses; and there will …

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Target2 May 2014

Negative Rates for Bundesbank TARGET2 Surplus?

The ECB surprised with negative rates on excess reserves, on the deposit facility and even on TARGET2. We clarify whether the Bundesbank, as a member of the euro system, must pay negative interest rates on its huge TARGET2 surplus.   It has been a quite discussed item in the blogosphere: Is the Bundesbank obliged to pay …

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Euro Downtalk

ECB Measures Background: How to Reduce German Competitiveness and Talk down the Euro

In our view, the ECB measures of June 2014 want to increase German lending, spending, salaries and inflation. Finally they target a reduction of German competitiveness. The ECB wanted to talk down the euro but will not succeed. We explain why the measure are bullish for the euro. We expect EUR/USD of 1.40 in the …

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Global Inflation

Global Inflation Spikes Up, Are You Sure About What You Are Doing Mr Draghi?

  The European Central Bank (ECB) has the habit of reacting late. As seen in July 2008 and July 2011, the ECB is often the last major central bank to hike rates. They hike rates at the moment when others prepare for a recession or a significant slowing. Currently we are witnessing the opposite movement: The world is getting …

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SNB Follows ECB? Pictet’s Negative SNB Interest Call

Pictet calls for negative interest rates in Switzerland in order to maintain rate differentials between the euro zone and Switzerland. Maintaining rate differentials would be useful for FX speculators and for money market funds that still invest in the euro zone. According to newest SNB data, the real effective exchange rate for the Swiss franc has …

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