Box 2: Euro area sovereign stress, the CHF-EUR exchange rate and SNB policy

MACROFINANCIAL ENVIRONMENT Financial Stability Report 2022 27

Euro area sovereign stress, the CHF-EUR exchange rate and SNB policy

The safe haven status of the Swiss franc has challenged the economy and the SNB. In June 2022, the euro (EUR) has fallen below parity relative to the Swiss franc (CHF). Being regarded as a safe haven, the CHF has been under appreciation pressure since the global financial crisis. The SNB has tackled the overvaluation

of its currency with massive interventions in the foreign exchange (FX) market and, at its peak, committed to a minimum exchange rate towards the EUR. At this time, the Swiss economy was challenged by a strong domestic currency on the one hand, and a distressed main trading partner on the other.

Figure B2.1

Shock to euro area sovereign stress and CHF / EUR exchange rate (impulse response function; x-axis: months; y-axis: changes in the CHF / EUR exchange rate in percent)

Source: Own calculations. 0.06

0.05

0.04

0.03

0.02

0.01

0

1 2 3 4 5 6 7 8 9 10 11 12

Sovereign stress in the euro area triggers an appreciation of the CHF. Based on monthly data from January 1999 to June 2022, a strong relationship between sovereign stress in the euro area and the movements of the EUR / CHF exchange rate is observable. Impulse response functions estimated using a Bayesian VAR model show the reaction of the exchange rate to a (one standard deviation) shock in the sovereign stress level. Figure B2.1 shows a significant, persistent appreciation of the CHF towards the EUR when euro area

sovereign stress increases. The results also hold true with respect to the real-effective exchange rate of the CHF relative to its most important trading partners. Empirical results suggest that the SNB is able to smooth the adjustment of the economy to appreciations by intervening in the FX market. Assessing the response of the CHF exchange rate to the SNB’s FX interventions, proxied by sight deposits of commercial banks at the SNB, the SNB seems to be able

to effectively impact the CHF exchange rate. Figure B2.2 shows a slightly delayed, but significant devaluation of the CHF towards the EUR when sight deposits at the SNB are shocked. Hence, when deemed

required, the SNB is able to “buy time” for the Swiss economy to adapt to a stronger domestic currency, and also to make sure that deflationary pressures do not get out of hand in Switzerland. BOX 2

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Financial Stability Report 2022 BEGINNING OF THE CHAPTER TABLE OF CONTENT

BOX 2

Figure B2.2

Shock to SNB sight deposits and CHF / EUR exchange rate (impulse response function; x-axis: months; y-axis: changes in the CHF / EUR exchange rate in percent)

Source: Own calculations. 0

– 0.01

– 0.02

– 0.03

– 0.04 1 2 3 4 5 6 7 8 9 10 11 12

Considering current inflationary pressures, the large balance sheet can serve as an effective tool to tame inflation without the need to raise the policy rate. Currently, when price pressures have led to rising inflation rates, a nominal appreciation of the CHF is welcomed for SNB policy makers to dampen imported inflation. In fact, high FX reserves in the SNB balance sheet could theoretically be used to buy CHF in the market, thereby facilitating a further appreciation of the CHF. In practice, further policy rate hikes will be necessary to ensure that inflation moves back towards the SNB’s target. Additionally, FX interventions – this time probably in the other direction – may prove helpful to finetune the monetary policy mix. Whether FX interventions to support the CHF, i.e. by selling FX reserves to buy CHF, are as successful and persistent as the interventions to weaken the CHF over the last years, however, is yet to be examined.

References

Gächter, M., Meier, M. and Tschütscher, N. (2022). Under Pressure: Euro Area sovereign stress and its implications on the Swiss franc and SNB policy. FMA Policy Paper, Mimeo. Tschütscher, N. (2022). The EUR / CHF exchange rate and euro area stress. Master thesis, University of Liechtenstein.