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Investors Bet on'Swiss Fhanc's Strength

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Switzerland has this year intervened in currency mar- kets the most since 2072, yet the franc keeps strengthening. That is a trajectory investors bet has further to go.

The Swiss National Bank last week said it has spent 90 billion Swiss francs ($98 bil- lion) in the first half of the year to keep its cwrency from ____________t_ appreciating. (URREI{CIES still, the

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franc has gained 5.7o/o against the dollar this year and traded Monday at $1.09 apiece. That is be- cause the dollar has weakened: The WSJ Dollar Index, which tracks the currency against a basket of others, has declined 1.2% in 2O2O.

In recent weeks, speculative investors increased bets that the Swiss franc will continue to strengthen against the dol- lar. The crurency continues to be broadly viewed as a haven asset and tends to rally when investors grow risk-averse.

One reason investors are betting on appreciation: The stronger the franc gets against the dollar, the less Iikely Swit- zerland will draw criticism or sanctions from the U.S.

President Trump's corona- virus infection, the November election and other political un- certainties in the U.S. are weighing on the Trump ad- ministration and could help shield the Alpine nation from tariffs and other punitive ac- tions in connection with its currency interventions.

'You're unlikely to see ag- gressive moves against Swit- zerland at this point in time," said Peter Kinsell4 global head offoreign exdrange strategy at Union Bancaire Priv6e. "The U.S. administration possibly has bigger fish to fry."

In previous years, Mr. Trump frequently decried that other economieq including the eurozone and China, gained the upper hand in trade by

lowering interest rates, which allows their currencies to weaken. A cheaper currency can make a nation's exports more competitive. Switzerland has historically managed its currency, and been put on the U.S. watch list in the past.

Any action by the U.S. Trea- sury Department could prove to be merely symbolic, at least initially. Washington is more likely to consult with the In- ternational Monetary Fund to try to eliminate the unfair ad- vantage the currency mea- sures have given a country, if it does anything at aII.

But over the longer term, the U.S. could opt to levy tar- iffs against imports of drugs, precious metals, art or an- tiques from Switzerland.

The Treasury uses three criteria to assess whether a country manipulates its ex- change rate: active interven- tion in currency markets,

Swiss National Bank's currency interventions

First six

200 billion Swiss francs months

trade surpluses with the U.S., and a iarge country's current- account surplus, which is a broader measure oftrade that includes investment income

Net speculative bets on the Swiss franc against the dollar

Positive values indicate more bets that the franc

-5,000 witl rise againstthedollar. rrr,

Nov. Jan.2020 Oct.2010 '15 ',20 \ore:200 billion Swiss frarcs=$218 billion Sources: Swiss Nati0nal Bank (interventions); Fadset (net bets)

and other financial flows. Switzerland was added to

the Treasury's watch list of crurency manipulators in Jan- uary after it met the require-

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sibly prove to be a fleeting re- action: The SNB has previouslY told markets that the U.S. tlreat won-t deter it from cur- rency interventions.

'1The impact is going to be very short term," Mr. Paolini said. He expects the dollar to weaken, lending to the franc's strength.

the Treasury in Aueust said Vietnam depressed its cur- rency in 2019, providing the first test case for a Trump ad- ministration initiative to levY tariffs against countries for al- Ieged currency manipulation. On Friday, the U.S. said it would launch an investigation into Vietnam's actions in the same process it used to Place tariffs on Chinese goods.

"The SNB's foreign-ex- change market interventions are motivated purely by mone- tary policy considerations," said FaD{o Sonderer, a spokes- pers0n for the SNB. "They are

not armed at conferrfng ao- u"rt"e"t on Switzerland bY undervatuing the franc"'

ihe strengthening franc makes Switzerland's imports'

cheaper and exPorts more ex-

;;;;il, weiehine on its infla- tion.

tvtr. Sonderer also noted Switzerland and the.U's' are Iimportant economic Part- neri" that are in frequert con-

ifi[ tg;ardinc financial and economic matters'

While the U'S' election may

shield Switzerland from any ffi"ai"t" actions bY the U'S'' ii*"v t"*. to inhibit turther intervention in currencY mar- kets bY the sNB'

'.With the elections comrng uD. vou don't want to be seen

a-"iri* anYthing," said Mr' ;;;]iri. tte exPects the sNB *itLtto* its stePs for the rest ;iiil Year, and the Swiss ir"rr. *iu aPPreciate acaitlt irr. aoUut "itis a very voiatile ana uncertain situation'"*'i"

botd markets, the Yield on the l0-Year Treasury .iimbea to O'760o/o' from O.694o/o FridaY'

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ments on trade surplus and current-account surplus. At the time, its currency inter- vention was less than 2% of its gross domestic product. But the first six months saw the SNB use an amount equivalent to more than 10% of its annual 'output

of goods and services. fire Swiss data released last

week marks the first time quar- terly figures were disclosed. The central bank historically only released annual data.

Investors expected the U.S. to release an updated report on ourency manipulators over the summer. One could be forthcoming, they said. The Treasury didn't respond to a request for comment.

If the U.S. labeled Switzer- land as a manipulator, the franc might briefly rally sharply against the dollar and euro, said Luca Paolini, chief strategist at Pictet Asset Man- agement. But t}tat wouid pos-

The filst half of 2O2O saw the SNB3 cunency intervertion equal more than 10% of GDP. The uruefllng of the new tfi]franc note last year.

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