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Kempen's Commentary: Manipulating currencies

24 January 2020

 

Manipulating currencies

Last week, the US and China signed their ‘phase one’ trade deal. Even though the really difficult subjects will only be discussed in phase 2 (or perhaps even phase 3?), this is still a sign of relaxation between the two super powers. Moreover, the US no longer labels China as a ‘currency manipulator’. China has had that status since August last year. It must be said that the Chinese currency has risen sharply since then. The US deems it manipulation when a country pushes its currency downwards and not when this is done in an upward direction. A cheap currency strengthens the export position of a country, that’s why it’s considered as unfair competition.

Switzerland is a champion
At the same time, the Americans have placed Switzerland on the watchlist of countries that manipulate their currencies. It’s actually surprising that this country wasn’t on that list yet. The Swiss short-term interest rate is the lowest worldwide, currently -0.75%, and often serves as an example of how low interests can go. In addition, the Swiss central bank has been trying to push down the Swiss franc for years through a buy-out program that doesn’t compare to any other central bank program. As a result, the Swiss central bank now owns foreign currency reserves of more than € 700 billion. Part of this is a equity portfolio that’s worth about € 140 billion. This puts the bank, that is also listed on the stock exchange, in the top ten largest shareholders worldwide. Since 2019 was a particularly good year for equities, it’s not surprising that the bank reported a profit of more than € 45 billion. The rise in the gold price also contributed to this. That profit eventually ends up in the Swiss cantons.

What does this mean for the euro zone?
It’s often said that the end of monetary instruments is near. That during the next economic downturn central banks will no longer be able to stimulate economic activity through a more accommodative policy. With a short-term interest rate that is already negative and a continuous ECB buy-back program aimed at reducing long-term interest rates, there is a truth in that. It’s why more and more economists say that governments should start spending more. However, the Swiss example shows how creative central banks can be. In the next recession, if only the need is high enough, we will see new examples of this.

The author

Michel Iglesias del Sol

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