It’s an odd thought that a country’s economy could be punished for being strong and stable. But that was the case for Switzerland in 2011, as Rodney mentioned above.
The Swiss franc has been gaining strength against the euro for several years, making the country’s exports relatively more expensive. That strength gained momentum in 2011 as the euro zone scared investors into ditching the euro and hiding in the safety of the “Swissie.”
Here’s a chart showing the exchange rate between the euro and the franc. The pair is quoted as EUR/CHF, so a downtrend indicates the euro is weakening and/or the franc is strengthening.
The red bars highlight the worse of the euro’s slide, from April 2011 through August…
This extreme move – and the fact that a Big Mac in Switzerland cost the equivalent of $10 at the time – prompted the Swiss to peg the franc’s rate to the euro in September 2011. You can see this time period highlighted in yellow.
The Swiss National Bank is buying euros in bulk to ensure the exchange rate remains at 1.20 Swiss francs per euro. This of course is an expensive endeavor. The central bank spent an estimated 65 billion francs in May alone to maintain the peg.
In the past, Switzerland has maintained a currency peg for up to three years. But it’s uncertain whether they’ll be able to last that long this time around.
Today, the currency peg makes the EUR/CHF worthless for traders – it doesn’t move. Eventually that will change and this pair will see an explosive breakout.
But first, the Swiss want to see the euro zone fixed. Let’s see how long they’ll hold their breath…
If you haven’t done so already read the Survive & Prosper issue on “Why We Won’t Get Hyperinflation“