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Banking interview questions: What are the implications of the soaring Swiss franc?

What to say when you're asked about the Swiss franc

What to say when you're asked about the Swiss franc

As part of a new series for students interviewing with investment banks, we’ll be running concise advice articles on how to answer questions on the big finance issues of the day.  Today: the shock decision from the Swiss National Bank (SNB) to stop capping the value of the Swiss franc against the euro. 

What does this mean for the Swiss franc?

Today’s announcement has had a “dramatic impact,” on the market say analysts at UBS. Initially, the Swiss franc fell by 40% against the euro. However, it rose to a level slightly above one euro following support from the Swiss National Bank.

What does this mean for the Swiss economy?

Unless the Euro/Swiss franc rate returns to its old floor of 1.20, analysts at UBS predict that the Swiss economy could be, “significantly impacted.”

If the Swiss Franc and the Euro become worth equal amounts (a real possibility), UBS warns that many Swiss businesses and investment decisions won’t be viable anymore. “Over time, a significant volume of economic production could move outside the country,” they warn. “If so, there could be a significant deflationary shock possibly not too dissimilar to the one Switzerland might have suffered had the floor not been introduced in 2011.”

What are the broader risks? 

The SNB’s move doesn’t just have immediate implications for the Swiss franc and the Swiss economy –  UBS says it also has broader implications for the Swiss National Bank. Most domestic Swiss businesses thought the central bank had ‘promised’ not to let the franc fall below 1.20 per euro. Suddenly, the central bank can’t be trusted and its credibility is damaged.

Deutsche Bank’s analysts say this could have a broader impact on investors’ risk appetite. “Given the large USD/CHF and EUR/CHF long positions outstanding in the market, the moves today have likely caused large losses on investor portfolios holding these positions,” they claim. This has effectively created a large shock to the market at a moment when investors were already highly sensitive to the risk of making losses.  Investors could become more risk averse in 2015 as a result. 

The sudden abandonment of the cap also has broader implications for the FX market. Deutsche Bank’s analysts predict that the Swiss franc will be used less as a funding currency now that it’s become more volatile.

What does this mean for Swiss banks?

Banking analysts at Morgan Stanley point out that the appreciation of the Swiss franc is bad news for banks like UBS and Credit Suisse which have big international operations and report their results in their domestic currency. Earnings per share at Credit Suisse and UBS could fall by up to 24% and up to 16% respectively, predict Morgan Stanley.

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