Wednesday, January 21, 2015

Francly Speaking


IIFL | Mumbai | January 20, 2015 11:50 IST

Whether you are planning an Alps excursion or dying to tie a Tissot or Rado round your wrist, think again! Notwithstanding the frantic claims of subsidized special trains and discounted shopping, your Swiss indulgence will now cost you dear, thanks to a furious franc surge.

Apart from the majestic Alps, the once-invincible Roger Federer or its exquisite brands of cheese, chocolates and clocks, Switzerland is also known for its robust banking and tranquil financial ecosystem. No wonder, the country is the favorite parking lot for scores of blue chip investors across the globe.

One would hence not have expected the Swiss National Bank (SNB) to become the circumstantial creator of a quake measuring exceptionally high on the financial Richter scale of currency markets. But the unexpected did happen, though given the why and how of the U-turn story, there’s little obscurity in the Franc move to insulate itself from the changing Euro-Dollar equations favoring the latter.

Not long ago, in 2011, the SNB had fixed a 1.20 floor cap on the Euro-Franc exchange to safeguard CHF from the perils of overvaluation and the huge inflow of funds from all over the world that had made the explosion nuclear. Being a commanding exporter of goodies from diverse sectors, it couldn’t afford to make life difficult for native entrepreneurs. ‘Print more francs, Buy more euros’ was the SNB mantra for almost three years in what was a pure maintenance job to honor the cap commitment.

In the light of Euro consistently going down vis-à-vis the dollar coupled with downward pressures of the near-imminent ECB quantitative easing, the bank now saw the futility of the euro accumulation and hence removed the cap. But given the long lull of steady state, this single-day decision of reversal as also the market-led consequence of a 30 per cent jump in CHF compared to the Euro allowed the shock value to overshadow the logic behind the move. Needless to say, the consequences for market players of diverse families were nothing but disastrous. Given the Franc’s trading ubiquity, brokerages and banks were among the worst hit, especially on Euro deals, while many Swiss equities plummeted, from the diluted competitive edge as a direct outcome of the currency gain. In another blow, many East European families now face a mounting mortgage burden emanating from Swiss Franc debts.

Pundits, FX gurus and otherwise, are busy analyzing the mid-term and long term impact of the SNB intervention and diversity of theories is obvious in such a volatile scenario. A probable SNB-to-ECB Euro sale spree, further Euro weakening, rate fixation warfare across Europe and growing dollar sustainability…the window of probability and possibility is more accommodating than authoritative.

What’s crystal clear however is the immediate adverse impact on Swiss industry both in terms of eroded competitive edge in export markets and fears of a depressed scenario at home from cheaper imports and falling prices. SNB chairman Thomas Jordan may well have dismissed the ensuing panic in his measured observation (‘if you decide to exit such a policy, you have to take the markets by surprise’) but the reflection of the ‘market surprise’ is more than evident in the tourism and prized buys segment, two of the leading Swiss sectors in both terms of volumes and value.

Swiss chocolates, cheese, watches would all now be decidedly expensive propositions. As for scores of travel enthusiasts, they would have to put their Swiss ski sloping plans on hold, save for the privileged World Economic Forum delegates who would definitely make it to the Davos ski resort, Franc up or Franc down. The Franc up story, however, could well be foremost on the Davos agenda this time round.