What should we expect of CHF / EUR Foreign Exchange?

Most of the Swiss residents living close to the borders ask themselves how is possible that by crossing the border one can buy the same thing much cheaper. Last Saturday afternoon for instance, I went to Konstanz (Germany) to have a walk for the City Center, visit the Christmas market and drink a couple of Glühwein. I left my car on the parking of a big Shopping Center and I calculated that more than 70% of the cars parked there had Swiss plates. I guess that all of them are attracted for the same, the low prices. Of course, I also took advantage of the occasion to buy a pair of shoes which I had already seen in Switzerland one week before. By doing this, I have saved more than 20% of their value.

How is it possible? Further considering that Germany, Austria, France or Italy are not exactly cheap countries and, besides, their VAT is in all cases much higher. The answer is on the peculiar evolution of CHF foreign exchange. I published this graph on my last post, where we can see clearly this abnormality.


When the Euro banknotes were put into circulation in 2002, the CHF/EUR FX was 1,455 and it remained constant until summer 2003. Then the European currency started to appreciate reaching its maximum (1,68) in Autumn 2007. However, since the financial crisis broke out hitting strongly Europe, this trend reversed and Swiss currency started to appreciate again very quickly. The CHF climbed to its all-time high against the EUR the 11th of August of 2011 (1,038). That day, the SNB decided to intervene in the market implementing unconventional policy measures. The SNB achieved to stop the race to the parity and established a FX floor against the Euro on 1,2 CHF/EUR. So far, this floor has been active while the appreciation pressures are ongoing.

Last April C. Grisse and T. Nitschka (SNB) published a working paper (see here) in which they analyze this situation. They define the Swiss currency as a “safe haven” against the Euro. That is, Euro holders tend to invest in Swiss francs in order to protect of a hypothetical Euro’s breakdown. These investments are independent of the common interest rates theory or other financial conditions. Therefore, they forecast that whereas the doubts about the Euro project will continue, the buying pressure won’t slow down.

This outcome must be seriously considered for all those who make business in both currencies or all those whose business depend of the CHF/EUR FX.

The EU is the first trading partner of Switzerland, so I guess that this paper will have been read carefully on financial departments of export companies and they will already be working accordingly.

Moreover, in my opinion, such a FX is also responsible of immigration from other developed countries apparently without unemployment problems like German or Austria. Switzerland has been historically immigration’s destination from Southern and Eastern poor countries, but recently, it seems there are immigration pressures from other development countries because of this abnormal CHF/EUR FX. A skilled worker living in the South of Germany, on the East of Austria, in the Southeast of France, or in the North of Italy, has now much more incentives to move to Switzerland than ten years ago. Since three or four years ago, the wages in Swiss francs are between 20% – 25% higher than their historic average. So, in addition of high salaries that Swiss companies usually pay, nowadays, one should add the FX’s surcharge.

Nevertheless, the paper also suggests that this situation will not continue forever. It should be expected that when the crisis of confidence in the Euro pulls away, the CHF/EUR FX will go back to its historical average, 1,4 – 1,5 CHF per Euro. It should be a warning alert for European workers, happiness is not forever.

Finally, of course, such a FX will continue being a nightmare for business within Switzerland but settled close to the borders. Their business won’t soar upwards till EU gets over, it takes the FX to depreciate and Swiss people lose the joy to buying in Euros. Meanwhile, I guess most of Swiss will do Christmas shopping abroad.