This might come as a shock to anybody who has recently ordered a coffee in Geneva, but the think tank said even after its recent appreciation, the franc’s undervaluation has been reduced but not eliminated. The institute, which has just published its semi-annual update of foreign exchange valuations and plays a regular role in international trade policy, estimated the franc is undervalued by 6.1%, and poured scorn on the SNB’s protests over the strength of its currency.
The SNB intervened to stem franc strength in September when EURCHF threatened to go through parity. The central bank introduced a floor in EURCHF at 1.20, saying the “massive overvaluation” of its currency threatened its economy. Since then, EURCHF has largely been confined to a range between 1.22 and 1.24.
The institute estimated that even at current exchange rate levels, Switzerland’s current account surplus would be at 5.9% of GDP in 2016, comfortably above its criterion for currency misalignment of a current account balance +/- 3% of GDP.
Furthermore, it said that Switzerland did not have a problem of a huge capital services surplus masking a serious trade deficit. On the contrary, it has run enormous surpluses on trade in goods and non-capital services as well, reaching 7.4% of GDP in 2009 and 10.9% in 2010.
“We can see no justification for the claim of ‘massive overvaluation’ for an economy running surpluses this high, on both the trade and current account balances,” the institute says.
Others were more forgiving of the SNB’s recent forays into the FX markets.
“The fact that the Swiss franc is trading close to its trade-weighted highs has been seen by some as justification for the SNB’s recent moves in the currency markets,” says Tom Levinson at ING Financial Markets.