Switzerland: An Alternative Insight into Current Franc Strength!
The increasing strength in the Swiss France is causing reverberations. More a reflection of U.S. dollar weakness than that of the euro, the nominal trade weighted Franc is hitting new highs (Figure 1). But while this strength in impairing competitiveness – vital to an economy where exports account for 75% of GDP – this is not the whole story despite what are increasing complaints from high profile Swiss companies. Instead we would argue that with the strong currency also reducing import and producer prices, Swiss companies are enjoying a clear reduction in their cost bases. Moreover, this is even allowing a rise in profit margins as falling costs contrast with CPI inflation currently around zero (Figure 2). This is important in assessing competitiveness too as compiling a real or inflation-adjusted effective exchange rate shows a far less sizeable appreciation when deflated by producer prices rather than those for the consumer (Figure 3). Maybe this explains the recent rally in Swiss equity prices!
Figure 1: Record Swiss Franc Strength?
Source: SNB
According to press reports, the Swiss Franc’s continued rise is undermining the competitiveness of Swiss exporters. The surge in the safe-haven currency is hardly a euro-driven phenomenon, with the trade weighted index at new record highs (Figure 1) driven more by dollar weakness and encompassing volatile and uncertain geopolitics. This apparently is building up the pressure on an economy in which exports of goods and services add up to some 75% of GDP. While to some extent productivity gains can offset currency moves, recent rises in the latter - while a respectable 1%-plus - hardly offset the rises in the former, meaning that Swiss exporters have faced a double whammy of tariffs and currency strength over the past year. Notably, Switzerland and the U.S. agreed in principle last year to cap additional US tariffs on Swiss exports at 15%, down from a threatened rate of 39%, but the details have yet to be finalised.
Regardless, as with many things there are two sides to the currency strength story. Notably, even with exports accounting for such a sizeable slice of the economy, imports are almost as large at over 60% of GDP. In other words, while the stronger currency makes exports potentially more expensive in overseas markets, that same Franc strength reduces the costs of production too, thereby providing an offset that reduces the need and/or size of any rise in selling prices. As Figure 2 shows producer/import prices are running at around -2% y/y and have been so for well over two years. Indeed, this cost weakness has meant that (domestic) profit margins have actually been built somewhat higher as this fall contrasts with CPI inflation that is weak but still higher at around zero.
Figure 2: Swiss Franc Strength Behind Negative Cost Inflation?
Source: SNB, CE, % chg y/y
This distinction between what producer and consumer prices are running at is important is assessing a more authoritative picture of actual changes in Swiss export competitiveness. Using both the CPI and PPI to deflate a nominal trade weighted exchange rate index to obtain an inflation adjusted one shows that a producer price basis suggests very little actual deterioration in competitiveness (Figure 3) has occurred of late.
Even so, the Swiss Franc’s surge is a cause of concern for the Swiss National Bank. The latter could cut rates to try and restrain the currency. However, not only may this have little impact given the currency’s safe haven status, it also would mean a return to negative rates, which policymakers have overtly shown a reluctance to repeat.
Figure 3: Two Alternatives Impressions of Competitiveness?
Source: SNB, 2000=100. NB; last 12 months of PPI index estimated by CE
Moreover, while the strong Swiss Franc poses a clear disinflation pressure, with imported consumer goods inflation now running around -1.5% y/y, tis also not the whole story. Indeed, this masks clear domestic disinflation of late with adjusted m/m data suggesting that it now running at just above zero, actually softer than the main core CPI measure. This therefore means that the SNB faces a triple disinflation threat; from abroad via tariffs and the exchange rate but also now and increasingly at home. Admittedly, the SNB’s inflation target offers flexibility in that it merely stipulates inflation below 2%, but any prospect of persistent negative headline inflation is not one the SNB will take lightly. This is one reason behind out recent marked downgrade to our 2026 CPI outlook, down 0.3 ppt to 0.3% and with downside risks to the 0.8% rate forecast for 2027!