Tuesday, September 6, 2011

Switzerland Shows the Way!

The demand for Swiss francs is growing. What did the Bank of Switzerland do? It set a lower foreign exchange level for the Swiss franc and committed to buying as much foreign exchange as necessary to reach its target.

Perhaps foreign exchange targeting is the right approach for Switzerland. Generally, I think it is much wiser to allow foreign exchange rates to float and instead target nominal expenditure on final output.

Apparently, the rising exchange rate forvthe Swiss franc is pricing Swiss exporters out of foreign sales. From their perspective, demand is falling, so they sell less at lower prices in Swiss francs.(The prices to their buyers, in Euros for example, are rising.)

If the bank of Switzerland instead committed to keeping money expenditures on output on a stable growth path, which would include the Swiss franc value of the exporters' products, and purchased whatever assets, perhaps foreign currency, needed to accomplish that, then it is almost certain that the Swiss franc exchange rate would fall.

While I don't care for targeting exchange rates, I must admit that I like the sound of buying whatever assets are needed to accomplish the goal. If it were there Fed, no doubt they would have promised to buy $20 billion worth of foreign exchange or perhaps mumbled something about the Federal Funds staying rate low for a good long while or even few more years. Then, they would hope the dollar exchange rate would fall at a modest rate.

4 comments:

  1. Shouldn't they at least try to buy the most undervalued assets? Stocks, real-estate, bonds commodities, currencies etc.

    ReplyDelete
  2. Bill, I think it is important to see this in the light of the dynamic of the near panic like explosion in the demand for Swiss franc on the back of the European debt crisis.

    Furthermore, it is extremely important that nobody fundamentally doubt the SNB's commitment to their 2% inflation target. With CHF strengthening dramatically the SNB is undershooting the target. The bank is now acting to do something about. However, every European market participant would not do this if it would risk nominal stability. Afterall SNB has the best track record in the world on nominal track record so they can afford moving this aggressively without repeating their overall policy targets - everybody in the market place fully understand the policy objectives of the SNB - unlike what is the case for ECB and the Fed.

    ReplyDelete
  3. JWO, the SNB is not in the business of picking the winners...rather they are in the business of ensuring nominal stability - they are doing that through the most simple and easy to use instrument when interest rates are close to zero - the exchange rate.

    ReplyDelete
  4. Honestly, I am not all that keen with working on this currency, as I generally prefer EU or other pairs, it’s ever easy. But, I still love keeping myself updated with all the happening around which is helpful with this sort of blog. I do get advantage with my broker OctaFX as well through their lovely conditions including low spreads, high leverages, bonuses and all such features, it’s just awesome and makes trading ever so good for me in every way!

    ReplyDelete