Thursday, 15 January 2015, 10.30 am: the Swiss National Bank (SNB) sent a shock wave through the markets when it announced that it would discontinue its minimum exchange rate of CHF 1.20 to the euro. That rate had been maintained since it was introduced four years earlier. The euro almost immediately hit parity with the franc, and then hovered around CHF 1.05 for several weeks. Swiss industry was stunned and angry. How could it stay competitive when more than half its products were exported to the euro zone?

Monday, 26 September 2022: while the Swiss franc remained well below parity with the euro for several weeks, it crossed a new psychological barrier of CHF 0.95 against the euro. And no reaction. Not even the slightest concern expressed by Swiss industrial firms. Quite a contrast to the widespread panic from a few years earlier. Have Swiss companies become so efficient that they will not let mere exchange rate fluctuations bother them? Or is it a change in the economic climate? 

"If we take the real exchange rate the Swiss franc is lower against the euro than it was in 2015 after the SNB discontinued its minimum rate"

Martin Eichler, a member of the management board at BAK Economics

Both, according to the experts we interviewed. At the macroeconomic level, the essential difference between the context in 2015 and the situation today boils down to one word: inflation. Inflation has been unhinged for several months in the eurozone, where prices rose by 10% year-on-year in September, according to Eurostat, compared to only 3.3% in Switzerland. This differential compensates for the competitive disadvantage caused by the exchange rate and has therefore benefited Swiss companies that export their products to the EU. "If we take the real exchange rate (ed. note: factoring in relative price levels in Switzerland and the EU), the Swiss franc is even lower against the euro than it was in 2015 after the SNB discontinued its minimum rate," says Martin Eichler, a member of the management board at BAK Economics. In detail, the SNB index which provides the real exchange rate of the franc in the eurozone (since December 2000 on a monthly basis in base 100) currently stands at 116, against nearly 120 during the first six months of 2015.

Another important difference between the current circumstances and those of 2015 is that, at the time, the euro’s decrease was sudden and dramatic, causing major instability. This is not the case today. The trauma experienced in 2015 had one positive outcome, in that Swiss firms took steps accordingly to safeguard themselves against exchange rate fluctuations, including optimising their production costs and boosting innovation.

"Swiss firms are now very cautious," says Michael Foeth, head of Swiss Industrial Research at Vontobel. "And they have become accustomed to offsetting currency fluctuations." As a result, many companies can opt for suppliers and subcontractors from the euro zone to reduce their costs. Plus, multinationals often have production sites in the countries where they sell their products. So the strong Swiss franc is not a cause for concern, at least not for the time being. "With the post-COVID recovery, Swiss companies’ order books are full," notes Maxime Botteron, an economist at Credit Suisse. "For the months to come, however, the situation looks more complicated. We should expect a decline in demand, especially in the eurozone." "We also need to be wary of the delay effect," Martin Eichler says.

"What is painful for Swiss firms is when rates move sharply and quickly"

Jérôme Schupp, analyst at Prime Partners

"Many companies sign medium-term contracts with their suppliers and customers. This shields them against exchange rate fluctuations for a while, but the real impact may hit in a few months." BAK’s chief economist outlines a standard scenario of the risk to a typical Swiss company. "It is active in metals; it uses a lot of energy and raw materials that it has to pay for in dollars; it manufactures most of its products in Switzerland but primarily exports them to Europe." This profile describes an SME rather than a listed multinational. Does this mean that most large Swiss companies are safe? How low can the euro go before Swiss industry experiences difficulty? "We regularly get asked this question," smiles Philippe Cordonier, spokesperson for French-speaking Switzerland at Swissmem, the umbrella association of the machinery, electrical equipment and metals industry. "It’s tough to answer because our sector is so diverse. The pain threshold varies considerably from company to company." Michael Foeth of Vontobel comes to a similar conclusion, "There is no model that would enable us to declare that the Swiss franc becomes too strong at a given point."

As the SNB is currently focused on containing inflation, a large majority of analysts expect the Swiss franc to continue to gain strength against the euro. In a 29 August article, Lombard Odier predicts a EUR 0.93/CHF exchange rate over the next 12 months, in line with estimates of other banks. In the same post, the private bank forecasts the USD/CHF currency pair trading at 0.95. Some go much further. Michel Girardin, a lecturer at the Geneva Finance Research Institute, estimates that the equilibrium exchange rate should currently be CHF 0.83 per EUR 1, based on purchasing power parity (PPP) and the spread between real short-term interest rates for the euro and Swiss franc. This leaves the SNB room to raise interest rates on multiple occasions to keep the franc high.

Most experts believe that the  Swiss economy will adapt, on the one condition that exchange rates do not change too suddenly. "What is painful for Swiss firms is when rates move sharply and quickly," says Jérôme Schupp, an analyst at Prime Partners. Fluctuations of around 2% to 4% per year are manageable, but things become more complicated beyond that. Companies cannot raise their prices too quickly and remain competitive. Based on that analysis, the Swiss franc has risen a little too fast in recent weeks."