The impact of Swiss Franc appreciation on the performance of the export-oriented Swiss watch industry

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The impact of Swiss Franc appreciation on the

performance of the export-oriented Swiss watch industry

A case study of the currency peg release in mid-January 2015

Master’s Thesis

MSc Finance and Strategic Management

Author: Tyll Wrase Supervisor: Steffen Brenner

Date of Submission: 1^st September 2016 Number of Physical Pages: 79 pages Number of Characters: 178,145

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Abstract

This thesis investigates the impact of the appreciation of the Swiss Franc on the performance of the Swiss watch industry following the release of the currency’s peg from the Euro. Due to the sudden lifting of the foreign exchange rate cap in mid-January 2015 by the Swiss National Bank, an environment of economic uncertainty developed. In order to realize what power such an event can have, the ex-ante and ex-post performance of the Swiss watch industry is examined. An empirical investigation is carried out adopting a difference-in-differences framework with other complementary statistical models.

Previous theories discuss the effect of foreign exchange rate movements triggered by direct monetary interventions on economic performance. Based on past evidence from scholars, a considerable currency appreciation can cause a shift away from a tradable goods industry. Taking the example of the tradable Swiss watch industry, a new approach of a relatively price-insensitive luxury sector is chosen.

To test the impact following the release of the currency cap on the performance of the Swiss timepiece industry, a total sample of up to 502 market-to-book time differentials per sector is chosen from mid-January 2014 to 2016 in the difference-in-differences analyses. The lasting effectiveness of such monetary policy change on industry performance is examined with the use of annual, quarterly and monthly intervals in the given framework.

The empirical analysis carried out discloses that the performance of the Swiss watch industry is not significantly impacted by the exogenous shock in the form of the monetary policy alteration in mid- January 2015. Neither of the investigated time-frames show viable results. Only noticeable is a tendency of short-term effects on watch industry performance. However, additional empirical research has to be conducted to attain statistical evidence. Hence, the move from a fixed-peg currency regime to a floating currency regime has no influence on an export-oriented luxury industry. From this it can be confirmed that high-priced luxury goods are immune to price sensitivity and more dependent on the economic situations in customer countries. It is solely the low-priced electronic watch segment that fears a market share loss through any appreciation of the Swiss Franc but this does not diminish industry’s overall performance because its core competency is in manufacturing mainly high-valued mechanical watches.

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List of Abbreviations

CHF Swiss Franc

CNY Chinese Yuan

DD Difference-in-Differences

ECB European Central Bank

EU European Union

EUR Euro

GBP British Pound

GDP Gross Domestic Product

HKD Hong Kong Dollar

JPY Japanese Yen

PBM Portfolio Balance Model

SGD Singapore Dollar

SMI Swiss Market Index

SNB UK

Swiss National Bank United Kingdom

US United States

WTO World Trade Organization

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List of Figures

Figure 1: Thesis Structure ... 7

Figure 2: Illustration of the J-Curve Effect ... 15

Figure 3: Foreign Exchange Rate Movements since 2008 ... 25

Figure 4: SNB Foreign Reserve Assets ... 26

Figure 5: Swiss Export Development ... 31

Figure 6: GDP & Export Growth ... 33

Figure 7: Export Growth & Export Share in 2015 ... 37

Figure 8: Swiss Watch Exports in 2015 ... 40

List of Tables

Table 1: Pearson-Correlation Table ... 64

Table 2: Summary Statistics - Independent-samples t-test ... 65

Table 3: Results - Independent-Samples t-test ... 66

Table 4: Summary Statistics – DD Analyses with Banking Sector... 67

Table 5: ANOVA – DD Analyses with Banking Sector ... 68

Table 6: Coefficients – DD Analyses with Banking Sector... 69

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1 Introduction

The effects of foreign exchange rate fluctuations on economies due to direct monetary market interventions have long been discussed. On the day of the unexpected Swiss National Bank’s announcement in mid-January 2015 that it was abandoning the pegged exchange rate regime to the Euro, the Swiss Franc soared by over 41%. Eventually levelling off by more than 10% up on the Euro and other denominated currencies, the stronger Swiss Franc triggered a new wave of uncertainty for the Swiss economy.

The precariousness of the Swiss economy since the cap release casts a spotlight on the Swiss watch industry. Because more than 95% of Swiss timepieces are sold abroad, I have chosen this highly export-oriented industry as a case analysis of an industry that conducts trade predominantly in foreign denominated currencies. Complemented by selling predominantly highly priced luxury watches, a price insensitive industry sector is selected that has still experienced a 3,4% decrease in exports of timepieces from 2014 to 2015.

For this reason, this thesis seeks to investigate the effect of the release of a fixed-exchange rate on the performance of a heavily export-oriented industry like the Swiss timepiece sector. Previous scholars have found evidence that a currency appreciation can impact performance of tradable industry sectors. By choosing a luxury industry in form of the Swiss watch sector, one can examine if this also applies to a rather price-insensitive sector.

1.1 Core Motivation

The key moment that made me decide to choose this topic came when the Swiss National Bank announced the release of the Swiss Franc currency peg from the Euro. Such a sudden event does not typically have an immediate impact on foreign end consumers. However, it inspired me to study what effect such major monetary interventions can have on the given domestic economies and, primarily, on specific industry branches.

Choosing the Swiss watch industry as an example was particularly fascinating because of its high export-orientation and high-priced goods. The main focus depends on whether such a heavily export-oriented luxury industry is sensitive to currency effects and, more importantly, if such a

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change in monetary policy has a significant impact on this industry sector. In addition, I want to explore what led to such a peg release in order to be able to determine whether warning signals for future events can be identified to use in contingency planning for exposed industries.

1.2 Problem Statement

The influence of direct currency interventions has long been discussed¹. Nevertheless, the relationship what interventions, and accordingly currency movements, can have on specific industry branches are still not widespread. Past researchers have come up with different conclusions when such monetary policy change is undertaken and what such monetary policy alteration can have on a nation-wide level. On an industry-wide level, there is scarce research available to tackle the problem if such a causal relationship exists. Investigating the recent phenomenon of the currency release in combination with the Swiss watch industry is particularly of interest. Due to the its high share of luxury watch sales, one would like to assess whether non-price-sensitive industries such as those producing luxury goods are robust in face of great currency appreciation, in particular with relation to the Swiss Franc for the purposes of this thesis. This leads to following problem statement.

What effect does the value of the Swiss Franc have on the Swiss watch industry’s performance? In particular, what impact does the release of the Swiss Franc’s peg to the Euro by the Swiss National Bank in mid-January 2015 have on the Swiss watch industry’s performance?

I address this key problem statement throughout my thesis, enabling a hypothesis that can be used to solve the problem.

The Swiss watch industry is not affected by the currency peg release to the Euro in mid-January 2015

1.2.1 Addressed sub-questions

Besides the above mentioned problem statement, many surrounding questions need to be outlined as these also have to be solved to obtain a complete and robust answer for the problem statement.

1 Section 2: Discussion of theory

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 What are direct currency interventions?

 How can one determine potential monetary policy intervention in advance?

 Which factors can affect trade and correspondingly industry performance?

These questions are answered in the second part of this thesis, the literature review, where the reader gets a first understanding of monetary policy action as well as the factors influencing trade.

The reader should understand the context so the linkage between both pillars can be made.

Furthermore, the reader gets an understanding of what happens when such monetary actions are executed.

Other questions are answered in the following contextual analysis section. The specific case of monetary intervention in Switzerland has to be examined to understand the motivation behind such action. Additionally, a thorough picture of all driving forces in the Swiss watch industry has to be obtained to comprehend the currency effect.

 What is the monetary policy of the Swiss National Bank and what are safe havens?

 How dependent are Swiss watch manufacturers on exports?

 How competitive is the Swiss watch industry in a global context?

In the final part, the previously addressed problem statement is answered by conducting an empirical analysis as well as combining the answers from the sub-questions above.

1.3 Research Approach

1.3.1 Method

To execute a thorough analysis, logical reasoning is key. Thereby, one need to view the problem if foreign currency appreciation affects industry performance from two-angles – with deductive and inductive reasoning. While inductive reasoning is a bottom-up reasoning and draws general conclusions from a micro-level context or so-called specific premises, deductive logic is applied to get a top-down overview where general premises are used to get precise answers (Babbie, 2013).

Deductive logic is especially essential when reviewing theory. A first thorough understanding about the topic is obtained and consequently expectations from the literature can be induced (Babbie, 2013). In particular, what monetary policy actions and consequently foreign exchange rate

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movements can cause to the Swiss watch industry. Such serves as a first basis for the empirical analysis where hypothesis are created. Since the deductive logic conduces to narrow down the research field, it cannot disclose if the hypothesis is true. For this, inductive reasoning is key as it tests the expectations from the previous research within the specific framework (Babbie, 2013). By investigating the effect of a currency appreciation on the Swiss watch industry performance, specific premises get examined and subsequently a general conclusion can be derived from there.

However, this conclusion has to be treated carefully as each case is individually different.

1.3.2 Sources

For undertaking this thorough analysis, an exhaustive amount of diverse sources has been taken into consideration. Through the source variety, a complete and reliable approach can be applied where the main issues can be tackled from all angles. In doing so, one can create a theoretical as well as comparative analysis. From there, one can develop the most appropriate foundation for conducting the empirical analysis.

The first part is the theoretical discussion, which is divided into two sections. Mainly academic articles from well-known scholars were applied. The section elaborates on the literature of currency intervention since its emergence. An in-depth comprehension from recent scholars and academics about monetary policies and its currency effect is obtained. The second part investigates more the theoretical foundations of the evolution of trade and how trade could be impacted by foreign exchange rate movements. In the second section, most-recent articles from all reliable sources were used to get a broad picture about the monetary, economic and industrial landscape. In order to incorporate the recent event of the currency cap removal, all secondary research possibilities were investigated to get a full picture how the peg release might have impacted the industry. This included newspaper online-articles, magazine journals as well as economic databases.

To conduct an empirical analysis where the corresponding methodology acts as the foundation, all primary resources for obtaining precise research methods were used. Especially, scientific articles that have applied similar methods as well as educational literature on statistical methods were considered.

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1.3.3 Quality of Sources

The thesis relies on two main sources – primary and secondary sources. While primary data is mainly gathered through the carry out of an interview as well as an empirical investigation, the latter aspect is more comprehensive and has diverse pool of sources such as academic journals, existing databases as well as books. All incorporated sources were ascertained to have valid and reliable information. Despite the fact that each source cannot independently display the whole verity, the synergy of applying diverse sources made it possible to capture the complete image in an objective and thorough manner. In order to realize such, one also had to rely on opposing sources to obtain the most diverse depiction that is perceptible as true and valid.

In particular, validity and reliability are key to the analysis. According to Field (2013), validity shows to what extent a tool measures what it is supposed to measure. Therefore, the choice of variables as well as the underlying empirical study has to match the main problem statement to verify that not misalignment can emerge which ultimately could cause an unintended outcome. By the virtue of the thorough contextual analysis and literature review in combination with the methodology, the background is extensive to comprehend the used empirical method with the corresponding variables.

The second aspect reliability assures that a consistency in the measuring tool exists (Field, 2013).

Due to the fact that the majority of the empirical analysis is conducted with a large dataset, the foundation for the underlying research methodology is set and hence, increases the reliability for generalising the results of the extended analysis. Nevertheless, some part of the methodology relies on a different dataset from annual reports where the size as well as variable can cause issues. While the size is relatively small due to the restricted time period, the variable relies on specific accounting metrics which vary between industry sectors. Hence, it could cause an estimation bias.

Despite the potential problem, I do not perceive it as a serious problem since it only reflects a small proportion of the analysis where the used accounting variables are retrieved from firms of the same leading share index, the SMI.

If either of the two, validity and reliability, are not apparent, the analysis is not coherent and causes discrepancies in form of measurement errors. Due to the described conditions in the past two paragraphs, such circumstances are not perceptible.

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1.4 Disposition & Delimitation

In the introduction, the reader will get a first glimpse why this distinct topic is chosen. The main triggering motivational aspects as well as the background of the chosen topic are discussed. A first overview about the Swiss Franc is obtained by describing its influence and the underlying event, the currency peg removal from the Euro. It is followed by elaborating the link to the Swiss watch industry and its potential impact of the currency appreciation on the particular industry. In the problem statement, the main issues are raised however not answered. It sets the groundwork for the following sections to determine what needs to be examined to attain an exhaustive conclusion later.

The last part of the first section describes the sources and approaches so the reader understands the working practices applied in the thesis.

The second part is a thorough literature review of two distinct aspects. The first one discusses scholars’ recent work about direct currency intervention. Particular methods as well as underlying triggers of monetary policies are explained. The second section of this part reviews important trade theories and more specifically theories that investigate the impact of currency fluctuations on economic performance. The combination of both parts is essential to realize the interdependency between monetary policy making and industrial performance.

The third part encompasses an analysis of the whole environment to understand monetary policy actions of the Swiss National Bank as well as the performance drivers of Swiss economy with the timepiece industry. The sections are split into three separate segments. While the first part describes mainly the philosophy of the central bank and its historic interventions, the following analysis of the Swiss economy serves more as a basis before analysing the Swiss watch industry. In particular, the examination of the Swiss watch industry is of significance to observe how dependent the industry is on exports and respectively sensitive to foreign exchange rate movements and other factors.

The fourth and the fifth part of the thesis encompass the methodology and empirical analysis. The methodology is necessary to comprehend each statistical model’s advantages and why it is applied.

Due to the distinct time-event, specific methods need to be executed to understand if the currency is affecting the industry as well as if the peg removal had a significant impact. The following analysis executes the proposed models with the chosen variables. The outcomes of the statistical models are explained and its causal relationships to the previous environmental investigation are discussed.

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The last part elaborates on what has been discussed and analysed in all previous sections and summarizes the detailed analysis by given a thorough conclusion if and how the Swiss watch industry has been impacted by the Swiss Franc appreciation. The conclusion is finalized by outlining main limitations that have to be cautiously regarded as well as recommendations about further research to this topic.

Figure 1: Thesis Structure

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2 Discussion of Theory

To comprehend the overall theme of the topic, the literature review has to draw attention on two main modules that limit the theme. While the first review part puts emphasis on the emergence of direct currency intervention, the latter discusses the historic phases of trade theory in respect to foreign exchange rate effects. Whereas both components are debated separately, the review gives the reader an understanding of how each aspect functions and demonstrates the interdependent connection of both theoretical elements.

2.1 Direct Currency intervention

With the termination of the Bretton Woods agreement in 1973, a new era of monetary policy commenced (IMF, 2016). As Japan and the EEC nations declared to let their currencies float instead of rest upon a US dollar peg, a new currency system was created. This implied that monetary authorities could choose any foreign exchange arrangement. Thereby, central banks became monetarily sovereign and ultimately lead to a soar in direct currency interventions across the globe (Sarno & Taylor, 2001).

Baillie, Humpage & Osterberg (2000) defined currency intervention as a “sale or purchase of foreign currencies by the national central bank of a nation to impact foreign exchange movements”.

In addition to that, Gagnon (2012) explained that currency intervention attempts to prevent or push foreign exchange rates from its equilibrium value. Accordingly, such direct intervention can only be efficacious if no jawboning tactic is executed (Baillie et al., 2000). Monetary authorities decide on their currency level and its monetary supply through active interventions. In the economic history, the Plaza Accord was the first big collective intervention by several Western monetary authorities to depreciate the US dollar. As a result, economic growth was facilitated for Germany and Japan as US dollar nominated debt was easily repaid (Green, Papell & Prodan, 2015). This intervention phase ended with the Louvre Accord in 1987 to calm currency markets. After briefly discussing some motivations of sovereign nations, the choice of foreign exchange intervention can be of completely different nature.

Three key motivations for currency intervention are identified: protecting competitiveness, keeping financial stability and controlling inflation. As these intervention motives can be multi-influential

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on other goals, overall research views these reasons cautiously independent. In respect to the first motive, Krugman (1991) saw competitiveness of exports as the main reason for currency interference. Also Staiger & Sykes (2010) recognized currency intervention as a great instrument for export opportunities or vice versa reducing such. A currency manipulation is informally described as an export subsidy or an import tax for the domestic corporation (Mattoo &

Subramanian, 2009) since it can flourish or harm the existing business operations of corporations.

Such policies can be a value addition from an economic development or macroeconomic perspective (Staiger & Sykes, 2010). While competitiveness is a major influential indicator for intervention, financial stability is another driving force (Ostry et al., 2011). Through foreign exchange intervention, the financial markets can be partly controlled and hence, the exposure to economic shocks reduced. Eichgreen (1998) added that with financial stability; openness to trade, economic size and flexibility of labour markets can be effectively developed and therefore making use of such tool is lucrative as it also attracts new business to run operations in a non-volatile environment. The third intervention reason is inflation. Inflation determines the price level of products and thus the consumers’ purchasing power. It also stimulates consumer spending as capital is worth more today than tomorrow (Obstfeld & Rogoff, 1996). Thus, with an effective monetary policy where foreign exchange intervention is aligned to interest rate levels, a proposed inflation can be reached that can strengthen the economy.

There are also distinct recognition features that may result in foreign exchange intervention. Such can be from tremendous interest for corporate entities to hedge against unforeseen currency losses.

Dudler (1988) mentioned that widening bid-ask spreads and high currency volatilities may result in central bank actions as one tries to smoothen disordered markets. However, Baillie & Osterberg (1997) found evidence that this may cause more turmoil as markets react to intervention, and hence let volatility levels soar. Other identifying features are target levels imposed by monetary authorities. McKinnon & Schnabel (2004a) highlighted the asymmetric landscape of a global currency system. The scholars break down motivations between the economic conditions of nations and therefore classify such into developed and undeveloped countries. Here, Williamson & Miller (1987) proposed that advanced nations tend to have a particular bandwidth between two currencies to counteract in case of bandwidth exceedance. In addition to that, Goodhart & Hesse (1993) discovered that intervention was triggered through deviations from expected target levels.

Developed nations let capital markets choose to alleviate exchange rates though keep foreign

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exchange rate volatility on a day-to-day level (Schnabl, 2011). Especially in advanced capital markets, one can make use of adequate instruments to hedge foreign exchange risks (Schnabl, 2011). Nevertheless, in undeveloped capital markets, monetary authorities also attempt to manage day-to-day currency volatilities to decrease mainly fears of depreciation. One example was Croatia where high foreign liabilities increased the probability of default in case of depreciation (Schnabel, 2011). Besides discussing motives and identifying features of intervention, one also needs to draw attention on how intervention occurs to comprehend how such operations can be executed.

A currency regime can vary from floating systems where foreign exchange markets decide about its supply and demand; to a fixed exchange rate system where central banks peg their currency to a foreign value. With fully floating exchange rates, supply and demand is solely depending on market forces and not on monetary authorities’ activities. Although this is the most liberal regime, many nations have the prior discussed crawling bands where exchange rates have margins of fluctuations (Williamson, 1985), the so-called soft pegs. With such policy, monetary maintenance is necessary when reference rates are reached. Such policy can be imposed unilaterally or multilaterally in an international agreement. Stone, Anderson & Veyrune (2008) viewed deviations with up to 30%

from its reference point as soft pegs. While such target levels are the first level of currency manipulation, a more extensive maintenance is essentially needed when implementing a fixed exchange rate regime or a hard peg. Here, a nation fixes its currency value against a value like gold, another single currency, a combination of foreign currencies, a so-called currency basket or crawling peg. The graphic in Appendix 8.2 displays the overall development of the currency regimes where a slight trend towards a more floating regime is recognizable over a long-time horizon.

After emphasizing on intervention reasons and trigger mechanisms, to fully grasp currency intervention one has to elaborate on official intervention processes and its overall effectiveness. As Baillie et al. (2000) above described this process as governments intervene through a foreign currency sale or purchase to influence currency levels; one has to amplify on two possible methods:

sterilized and unsterilized intervention.

Sarno & Taylor (2001) defined sterilized intervention as operations undertaken to “sterilize or offset the effects of a change in official foreign asset holdings on the domestic monetary base.”

Simplified, this implies that whenever monetary authorities purchase or sell foreign currencies, the

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domestic currency supply has to be kept on level. For example, in case of a sale of foreign currency deposits, the domestic currency placed on the authority’s deposit has to be pumped back into the capital markets to keep monetary supply in equilibrium. Common liquidity sterilization methods are government bond purchases such as Treasury bonds and bills. In contrast, unsterilized intervention occurs when national central banks purchase or sell foreign currencies without such netting effects.

This implies that domestic currency supply will be increased or reduced through the purchase or sale of foreign currencies. Nevertheless, such money supply effects are controversial (Sarno &

Taylor, 2001) due to inducing the alteration in monetary stock and hence changing overall capital market expectations, interest rates and subsequently the participating exchange rates. Though, Baillie & Osterberg (1997) saw such non-sterilized intervention as the most effective tool for exchange rate alteration. In contrast, sterilized intervention is not essentially facilitating foreign exchange rate appreciation or depreciation because money supply is levelling in the short-run (Sarno & Taylor, 2001).

Nevertheless, the scholars show also evidence for an effective sterilized intervention under the portfolio balance model (PBM) and signalling channel theory. The former PBM assumes that investors balance their international portfolio with various foreign and domestic assets to maximize their return relative to the given risk aversion. Though, when central banks sterilize monetary effects after intervening with domestic asset purchases, the investor’s portfolio composition changes. Due to spot exchange rate modifications, the overall domestic price of foreign bonds is altered and hence its expected return is (Sarno & Taylor, 2001). Thereby, investors have to rebalance their international portfolios to retain same expected return levels, and consequently impact foreign exchange rates. The latter theory reasons that interventions give indications of future policy action as monetary authorities have non-public information. In opposition to that, Kenen (1988) argued that central bank action has to be transparent to preserve trustworthiness as otherwise ambiguous action would create market turmoil. The international coordination and channel of influence theory disclose similar signals for the public, solely on a bigger scale as several market participants simultaneously intervene in accordance to bi- or multilateral agreements. Hereby, Bryant (1995) also argued against that such interdependence may lead to a pareto optimal result where spillovers might be the consequence. In consideration to the mentioned theories, Sarno &

Taylor (2001) concluded that a sterilized intervention can also have a significant impact when such action-taking is publicly revealed and in line with the state’s monetary and fiscal policy.

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All in all, currency intervention has been a commonly used instrument to impact foreign exchange rates for a nations own interest. Thereby, researchers have found more evidence for the effectiveness of unsterilized intervention compared to sterilized intervention. To fully grasp the whole picture of consequences for such such action-taking by central banks, the second literature review part highlights the effects on trade.

2.2 Foreign Exchange Rate Effects on Trade

An independent ex-ante view on trade evolution theories is important to realize the overall framework of foreign exchange exposure on trade. By discussing several trade theories, one can realize where foreign exchange issues can evolve and how industries and its nations generally are affected. By discussing such aspects, one has to amplify the Rybczynski effect and the corresponding “Dutch Disease” as well a possible J-curve effect under the existing Marshall-Lerner condition.

2.2.1 The evolution of Trade theories

As trade has been a nation’s perpetual source of earnings for millennia, mercantilism was the first major economic theory that states nations should facilitate export growth over import, which was restrained, to maintain a positive trade balance that strengthens their wealth and superior power (Heckscher, 2013). Nevertheless, such idea was confronted with Adam Smith’s absolute advantages where the division of labour yields to industry and product specialization of nations and ultimately should lead to free trade where all countries benefit from. Hereby, Ricardo added later that a comparative advantage can be reciprocally advantageous for trade albeit particular countries possess an absolute advantage. He thereby found that technology can be a key driver for a comparative advantage as the nation’s productivity varies. Such distinct exploration was ground- breaking as it is nowadays a vital indicator for an industry’s success (Suranovic, 2010). Heckscher and Ohlin (1991) continued to work on the Ricardian model, and established the factor endowment model in the style of Ricardo’s technology factor. Based on this, overall trade is dependent on the country’s factor endowments, meaning its beneficial resources that facilitate manufacturing goods for example. Such endowments can vary from natural resources, a great labour work force to overall capital inflows. When possessing such endowments, Heckscher & Ohlin (1991) said that one can obtain a comparative advantage as nations will produce or make use of their endowments

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that are relatively abundant for exports and import in return scarce goods. This economic model is fundamentally important as one has to be aware of specific location factors that can have a crucial impact on the overall import and export. Being sensitive to such influential trade aspects, one can better grasp how goods are traded as these endowments can be triggers for shifts in trade. Overall, one has to put more attention on this aspect as this might result in foreign exchange rate movements, which subsequently can impact trade.

2.2.2 The Rybczynski effect and the Dutch Disease

After generally discussing factor endowments within the Heckscher and Ohlin model, Rybczynski (1955) highlighted how a change in the magnitude of a factor of production has an overall impact on overall consumption and the terms of trade. As the scholar mainly put emphasis on one factor, the model can be extended to many more. Thereby, he uses a homogenous production function where only two commodities are manufactured in a closed economy under the assumption that factors of production are perfectly mobile, perfectly divisible and too some extent substitutable. The production choice depends upon the factor intensity, the quotient 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑃ℎ𝑦𝑠𝑖𝑐𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑓 𝐴

Marginal Physical Product of B , where the higher ratio of the two is used by an industry to produce the product in the ratio’s numerator. Vice versa, as factor endowments do not give any support for the other good’s industry, factor intensity is lower implying that output of the good is substantially lower, too. Nevertheless, when a factor endowment alters or a new endowment emerges, it can have a significant impact on the production of the good as the factor intensity varies, indicating that it can ultimately result in positive or negative change in the output of such good.

Such phenomenon is universally called as the Dutch disease. In 1977, The Economist (2014) defined it after the exploration of substantial natural gas reserves at the Dutch coast, which lead to a shift in the industry focus from the manufacturing sector to natural gas exploration. Krugman (1987) asked why such event is seen as a disease. The Economist (2014) argued that such shift can harm economic growth due to overall modest performance with an industry change. As commodity discovery can be one reason for a nation to alter the industry focus (Beine, Bos & Coulombe, 2012), one also has to bear in mind that other endowments can influence an industry shift. As industry shifts are one causal effect, another aspect that has to be addressed under such scenario is the country’s competitiveness. Thus, trade can either flourish or lack as the economy’s foreign exchange rate fluctuations due to the introduction of new factor endowments.

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Corden (1994) saw capital inflows as a major influential indicator for domestic currency movements since it can trigger a Dutch disease. In particular, developing and emerging economies can suffer from capital flows as nations strongly depend on exports. As capital inflows let the domestic currency appreciate, export competitiveness deteriorates. Nevertheless, it can also diminish poverty and increase economic growth, since remittances is a common monetary transfer method in such countries for supporting domestic citizens from abroad (Adams & Page, 2005).

Though, such capital inflows also lead to a currency appreciation. This weakens the overall export- oriented industries and accordingly causes a current account drop and simultaneously let the exposure to an economic crisis soar (Saborowski, 2009). Besides that, it raises the chance of an industry switch from tradable to non-tradable goods as higher spending levels increases the demand for non-tradable goods in developing nations and hence lead to a resource movement, the so-called Dutch Disease (Lartey, Mandelman & Acosta, 2008). Especially, fixed-exchange rate regimes are exposed to a possible Dutch Disease as relative price levels of affected industries cannot quickly respond to capital flows (Lartey, 2008).

As the spotlight was so far on developing and emerging nations, also developed nations can be subjected to a Dutch Disease by the means of high volume movement of capital with either in or out of the country. Lartey (2008) investigated such effects in a small open economy and derived important findings. Thereby, developed nations are especially vulnerable to a Dutch Disease caused by capital movements when a fixed nominal exchange rate regime is implemented. No matter what developmental state a nation resides in, a hard peg can significantly impact domestic competitiveness as changes in the trade balance occur and concurrently an industrial transformations results (Lartey, 2008). Though, the scholar found evidence that the monetary regime is pivotal for such effect. For this reason, Lartey (2008) suggested an implementation of the Taylor interest rate where the nominal interest rate responds to changes in foreign exchange rates.

Through such provisions, the monetary authorities attempt to control capital flows where interest rate changes can influence the currency’s attractiveness for foreign investors. Hence, Dutch disease effects can be mitigated since monetary policies counteract capital movements and consequently also stabilize existing industries. A deep and active financial sector can overall reduce the effect of capital flows and therefore diminish the bond between currency appreciation and international capital flows (Otker-Robe et al., 2007). Saborowski (2009) added that widely open, liberal and developed financial markets tend to channel capital flows into such industry sectors where capital is mostly demanded and hence utmost efficiently invested.

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To put it in a nutshell, theory suggests that the nation’s economic condition, its financial markets and overall monetary policy give strong indication over suffering from a Dutch disease. In particular, an effective monetary policy can be crucial for disease circumvention since fixed- exchange rate regimes increase the probability of such break-out.

2.2.3 The J-Curve Effect under the Marshall-Lerner Condition

With the goods market model, a direct contingency of the foreign exchange rate to the overall domestic trade balance is expected. Implying that a domestic currency appreciates (depreciates) when the current account increases (decreases) or differently said, exports rise (decline) while relatively imports fall (surge). Thus, supply and demand for goods are always matched to the corresponding currency movements in the market. Rose (1990) mentioned that a 10% currency decrease can positively impact a nation’s trade balance by up to 10%. Though, Suranovic (2010) mentioned that overall current account changes are not directly noticeable after exchange rate movements. He explored that such foreign exchange rate movements have antipodal short-term effects on overall exports and imports. In other words, if the foreign exchange rate depreciates (appreciates) then temporary effects will be opposing to the above mentioned current account logic.

Researchers call this phenomenon the (reverse) J-curve Effect. The graphic below illustrates such J- curve effect where the current account temporarily drops and then recovers in form of a J-shaped curve over a long-term horizon while the foreign exchange rate depreciates simultaneously.

Figure 2: Illustration of the J-Curve Effect

Data source: Suranovic, 2009.

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Suranovic (2009) argued that the convex current account curve arises when prices and quantities for imported and exported goods are ex-ante negotiated and settled. Though, the delivery date has to lie in the future. Due to the ex-ante contract settlement, prices are fixed and cannot be adjusted to currency movements. Hence, for example in advance negotiated imports can result in higher payments when contracts are settled in the foreign denominated currency. Demirden & Palestine (1995) saw these contract inflexibilities as the main indicator for a countercyclical trade balance.

Though, Gupta-Kapoor & Ramakrisnan (2006) also found evidence that overall export and import levels do not significantly change in the short-run due to lags in recognition for a currency change.

In addition, Junz & Rhomberg (1973) mentioned that manufactures still live on their inventories and are not in direct need for replacement. Generally, all these aspects can lead to a temporary trade deficit. Since contracts are staggered over time as well as awareness creation for a situational change develops, current account adjustments to currency movements can take up to 18 months (Suranovic, 2009). Demirden & Pastine (1995) viewed this temporary misalignment as a failure of the Marshall-Lerner condition.

The Marshall-Lerner condition is an important criterion for current account alteration. A trade balance improvement or an opposing deterioration under a currency appreciation can solely sustain in the long-run when the Marshall-Lerner condition holds. Davidson (2009) defined this condition such as “the absolute sum of the long-term export and import demand elasticities is greater than unity.” In particular, price sensitive industries are impacted by currency modifications where demand for these elastic goods changes considerably. Nevertheless, in the short-run trade remains inelastic due to the discussed causal effects. Generally, not all researchers have found evidence that the J-curve effect holds. Yellen (1989) only found evidence for Japan from all G7 nations, while Mahmud, Ullah & Yucel (2004) discovered positive J-curve results for Norway. In addition to that, Shirvani & Wilbratte (1997) saw that the trade balance is neither positively nor negatively affected by some currency movements in the short-run. This still gives room for interpretation if this theory is fully applicable to every nation.

Scholars and academics do not generalize (reverse) J-curve patterns after foreign exchange rate depreciations (appreciations) in the short-run. However, common agreement under researchers exists for a long-term current account impact after currency appreciation or depreciation. The study by Bahmani-Oskooee & Niroomand (1998) summarized the broad scholar’s perception as their research found long-term impact on trade balances from currency movements for almost all 30 nations they examined.

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3 Contextual Analysis

3.1 The Swiss Franc – A Safe Haven?

Ronaldo & Söderlind (2010) defined a safe haven asset as an investment opportunity that acts as a hedging instrument in times of market turmoil and recessions. Such assets move countercyclical to financial markets. Besides other widely accepted safe haven possessions such as precious commodities like gold, currencies are other common hedging instruments for minimizing investor’s portfolio risk in unsound occasions. For example, commonly accepted currencies like the Japanese Yen and the British Pound work as prevailing measures in a case of economic recession or market plunge (Ronaldo & Söderlind, 2010). The Swiss Franc is also labelled as a major hard currency that has safe haven patterns. Grisse & Nitschka (2013) found out that with high systematic risk, it lets the Swiss Franc appreciate against typical carry trade investment currencies as well as against other major currencies. In particular, after the financial crisis in 2008 with the bankruptcy of Lehman Brothers and the subsequent recession, the Swiss Franc significantly appreciated against the Euro currency due to its safe haven characteristics.

To completely comprehend why the Swiss Franc works as a counteracting measure for minimizing portfolio risk in case of a global financial meltdown, one has to amplify key characteristics of the Swiss political, economic and financial context. Thereby, one can realize why the safe haven behaviour is significant for the Swiss Franc. The following sections emphasize four of Habib &

Stracca’s (2011) described hard peg features – evaluating Switzerland’s political and regulatory risks, the economic vulnerability, liquidity and size of the financial market of Switzerland as well as the Swiss financial openness to trade. The monetary policy of the Swiss National Bank is regarded separately in an independent section afterwards as the monetary policy leans on some of these particular aspects. Despite the fact that some of Habib & Stracca’s (2011) safe haven characteristics do not give full scientific support, these aspects will be still touched on as these indicators are contextually important to understand the Swiss Franc as a safe haven currency.

3.1.1 Safe Haven characteristics of the Swiss Franc

Assessing Switzerland’s political and regulatory risk for a safe haven

Solely surrounded by European Union member states, Switzerland is the one of the few nations in Europe that has kept its political and monetary independence. This freedom has been preserved

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since the treaty of country neutrality in 1815 (Vagts, 1997). Such political facet of diplomatic non- intervention has shaped the overall awareness of Switzerland. Through no warfare participation and a neutral foreign policy, Switzerland has gained worldwide credibility and integrity on all accounts.

With such a political foundation, Switzerland possesses already the status of a non-monetary safe haven where country risk is minimized. AMB (2015) graded the political risk for Switzerland as very low where political institutions are perceived as very stable. With consistent and predictable political actions, unforeseen events are very unlikely to occur and ultimately also give more trust to foreign investors.

The Rule of Law Index (2013) confirms this by placing the Swiss Franc on the 32nd spot on a global scale of 144 countries. Hereby, government regulation, the legal framework, corporate boards, property rights and investor protection are conjointly examined where the weighted average of all five categories is calculated. Such robust indicator shows that it can easily attract foreign and domestic capital when sound regulatory mechanisms are implemented. Solely, one indicator shows weaknesses as the strength of investor protection is violated. This occurred because the Swiss bank secrecy has been lifted through the accession of the OECD’s automatic information exchange on tax affairs in mid-2014 (OECD, 2014). Through this, Switzerland has partly lost its tax haven status as bank account details need henceforth to be disclosed. From 2018 on, bank account details will be fully exchanged between the EU and Switzerland (Süddeutsche Zeitung, 2015). Nevertheless, all other four indicators of the Rule of Law Index show even stronger support for high investment attractiveness. In particular, property rights and the efficiency of settling legal disputes are both ranked within the top 5 of the 144 evaluated nations.

Overall, the regulatory as well as the political context indicate that Switzerland can be perceived as a safe and stable nation. Especially, due to the mentioned country neutrality, Switzerland sets the foundation for accepting foreign money streams from non-domestic investors. Therefore, the Swiss Franc can be considered a safe haven when looking at these particular aspects.

Assessing the economic vulnerability and the financial market of the Swiss Franc

Since political and regulatory stability is partly the foundation for a safe haven in Switzerland, especially economic aspects still need to be discussed. Habib & Stracca (2011) mentioned the inflation rate as a key variable. With -1.14% (OECD, 2016a), Switzerland had a negative inflation rate in 2015. With such deflationary measures, overall economic growth can be harmed since

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consumption is hindered. Nevertheless, low inflationary aspects give more support for a stronger currency than high inflation rates as currency supply is kept proportionate to its monetary demand in the market. In addition to the inflationary aspect, interest rates are also extremely low. Hereby, the ten-year maturity bond, the so-called Swiss Confederation bond, has a spot interest rate of - 0.30%, while overnight borrowing is punished with -0.73% (SNB, 2016). Such measures are counteracting to a safe haven currency where typically high interest rates should stimulate foreign investors to invest their capital into bonds. A negative interest rate antagonizes a deflation so that investment attractiveness is retained moderately. Such signs display that the central bank does not have the need for making its currency more attractive since the general market perception already views the currency as lucrative. To entirely understand the monetary policy, the policy of the SNB in the global context will be discussed in the later section.

Other safe haven characteristic is Switzerland’s public debt to gross domestic product (GDP). With only 34,2%, Switzerland has an extremely low government debt to GDP ratio. In comparison to Switzerland, the European Union (EU) has an average of 93.5% where Germany as one of the wealthiest nations of the EU has a ratio of 71.6% (Trading Economics, 2016a). Such relative indicators show how vast the financial strengths of Switzerland are, and consequently give the economy more trustworthiness. Particularly in economic downturn, such essential characteristics surface as Swiss credit default risk does not substantially increase when financial burden rises due to its relatively high gross domestic product. This gives the investor support for its safe haven choice as the Swiss Franc would not be heavily impacted by any market disorder.

To assess the economic vulnerability of a nation, one also needs to investigate the current account balance of payments over GDP. It is overall sum of net exports of goods and services over GDP.

Such measure is vital. It gives indications about nation’s competitiveness, savings, as well as its domestic demand. Here, Switzerland possesses a strong surplus of 7% (Worldbank, 2016). With such a high trade surplus, the nation heavily depends on its export merit. Due to its small open economy, domestic consumption does not saturate the overall market for the production of goods and hence the Swiss economy relies severely on exports. Such contingencies can harm the Swiss economy in times of global recessions. However, a trade surplus raises the overall capital account and subsequently affects its foreign exchange rate as the currency strengthens. With such a positive current account balance to GDP ratio, another safe haven condition is met for the Swiss Franc.

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A similar characteristic to the above mentioned point is net foreign assets to GDP. It shows overall ownership of foreign assets by the Swiss National Bank less its foreign liabilities divided by the gross domestic product. Net foreign assets give insight if a nation is seen as a net lender or net borrower. Due to the recent monetary policy imposed by the SNB, to keep a stable foreign exchange rate, this ratio is extremely high. With 541 billion CHF of foreign assets (SNB, 2016) and a GDP of 642 billion CHF in 2014 (Statista, 2016), the ratio was approximately 84%. The SNB possesses mainly denominated Euros and US Dollars as well as other foreign currency denominated assets. Such high foreign asset position by the Swiss central bank discloses that the monetary authority has occasionally to intervene in foreign exchange markets to keep its currency on a competitive level. Such high foreign assets only strengthen the Swiss Franc as a safe haven as it implies that the Swiss Franc otherwise would further appreciate if these foreign assets were in the market. The overall evolution of currency intervention by the SNB through the purchase of foreign currencies will be discussed in more detail in the section of the SNB’s monetary policy.

For the completion of central economic safe haven features, the foreign exchange reserve to import ratio needs to be addressed. This ratio is crucial as it discloses the import coverage, implying to what extent a country’s foreign exchange reserves can incorporate the total expenses of imports. In December 2015, the Swiss central bank possessed 601 billion CHF foreign exchange reserves due to stockpile measures by the SNB while the total imports amounted to 166 billion CHF (Trading Economics, 2016b). With a ratio of 3.62, the Swiss nation has extremely high liquidity as import bills can be easily paid. Such healthy ratio further attests the Swiss currency a safe haven status.

After investigating specific economic indicators for the significance of a safe haven, Switzerland and the Swiss Franc send strong signals for safe haven investors. Especially, high foreign exchange reserves to import and low public debt to GDP ratios bring evidence to investors that look for secure investments in bad financial times.

Assessing the financial market: size and liquidity

Following the two discussed sections, another important indicator for investors are financial market characteristics. Thereby, the focus is mainly on size and liquidity of the Swiss financial market as these are essential investment criteria. Generally, investors need open market access to liquidate or purchase their safe haven currency to counteract market movements. The Swiss economy with a total GDP of 665 billion USD in 2013 contributed solely a petite amount to the overall world GDP

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of 76 trillion USD. In different numbers, a small fraction of 0.875% was only generated within the borders of Switzerland (World Bank, 2016a). Such numbers do not give substantial support for a safe haven nation. Though, other discussed criteria change the general perception.

Habib & Stracca (2011) underpinned the importance of the market capitalisation to GDP as well as the market capitalisation to world GDP. Such attributes give hints about the size of the market. The Swiss market index (SMI) encompasses 90% of Swiss market capitalization where the 20 firms from the blue chip index have a market capitalization of 1040 billion CHF. The affiliated Swiss mid-cap stock index comprises 154 billion CHF at the end of 2013 (SMI, 2015). Summarized, SMI Expanded covers 1196 billion CHF, leaving approximately 130 billion CHF to non-SMI listed stocks. With an estimated market capitalisation of circa 1,330 billion CHF, the Swiss stock market is comparatively seen to financial markets like the United States or Japan as small. Though, in regard to its GDP in 2013 with 634 billion CHF, the ratio is very strong with approximately 2.1.

Despite the fact that the United States is the largest capital market with about 26.3 trillion USD outstanding stock value in 2014, its market capitalization to GDP ratio is with 1.51 substantially lower (World Bank, 2016b). Such great strengths of the Swiss financial markets appear to be attractive for investors and hence disclose another motive for a safe haven destination.

Besides the stock market capitalization, Habib & Stracca (2011) stressed the important financial market indicator, the private debt to GDP ratio. The numerator includes all domestic credit provided to the private sector through credits, non-equity security acquisitions, trade credits and other methods where the purchasers is obliged to repay the amount he borrowed. Vague (2014) said that fast private debt growth always resulted in crisis when GDP growth did not correspond equivalently. The best example was the financial collapse in 2008 that was mainly triggered by soaring private debt levels. According to the OECD (2016b), Switzerland had a private sector debt to GDP ratio of 207.9% in 2013. This ratio is slightly below the OECD average of 211.6%.

However, Vague (2014) also argued that any private debt to GDP ratio above 150% can raise questions when this proportion also grows by a significant amount in a short time. As recent monetary actions by central banks through lowering interest rates and pumping more money into financial markets have caused such high private debt levels, these levels have to be cautiously recognized. Though, private debt to GDP has been reduced from its peak in 2012 by 8.4%, showing indications that the the Swiss financial market is slowly recovering from its peak and hence

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signalling better financial market conditions for investors that seek for secure investments possibilities.

A last important financial market feature is the bid-ask spread for foreign exchange rate markets.

Bid ask spreads imply whether assets can be easily traded. Hereby liquidity plays a vital role as it says if an asset can be easily acquired or sold. The smaller the bid-ask spread, the higher the liquidity of the specified financial asset. Another influential aspect on bid-ask spread is the overall volatility of the underlying asset as spreads will increase with higher volatility. Additionally, the afore mentioned economic and political risk can influence spreads. Referring to liquidity, especially currencies tend to have small bid-ask spreads as they are most frequently used in a global context with billions of cross-border transactions on a daily basis. Oanda (2016) published live currency bid and ask prices Euro/CHF as well as the USD/CHF. Overall real-time bid-ask spreads are very low with 2.071 bps for EUR/CHF and 2.114 bps for USD/CHF as Appendix 8.1 displays. As these are also recognized under the top 10 most frequently traded currency pairs of the Oanda currency trade platform, it gives strong support for the Swiss Franc as a safe haven currency.

To complete the financial market analysis, one can conclude that the Swiss financial market demonstrates low vulnerability to investors. As safe haven investors tend to flee to to big capital markets in times of market downturn, the Swiss financial market crystallises itself as a counterexample for investment opportunities. Hereby, the small Swiss financial market is exposed to higher demand which result in superior price effects for undersized supply. Such aspects keep liquidity high while market size is still small. Habib & Stracca (2011) view this size and liquidity relationship cautiously. Nevertheless, another supporting feature is private debt since it tends to decrease. Therefore, it strengthens the currency as a safe harbor.

Financial Openness

A last major safe haven category is financial openness. This particular group implies to what extent foreign investors can engage in transactions within Swiss boundaries. One example is how easily external investors can purchase or sell financial assets in denominated Swiss Franc. Building up on Schindler’s framework, Fernández et al. (2015) classified Switzerland as a country where capital controls are episodically implemented. Thereby, the SNB can intervene into capital markets whenever needed, such as lowering negative interest rates even further. Though, such direct capital

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controls are only infrequently established and will be in the next section discussed. However, other signals exhibit more reasons for Swiss financial openness.

One of such properties is the foreign debt to GDP relationship. Foreign debt is described as the nation’s debt, which is lent to external borrowers. This category can incorporate multinational corporate entities, foreign commercial banks, non-domestic governments as well as private households. All debt, which is issued by commercial banks and other institutions, has to be repaid in the currency where the obligation has been made. According to Mecometer (2013), Switzerland has an average external debt to GDP ratio of 265% in the period from 2006 to 2012. With such a high proportion, Switzerland is ranked number 12 in the world. In 2014, foreign lenders borrowed 1.533 trillion USD in Switzerland (CIA, 2016). This gives the Swiss nation an extraordinary credibility for lending and also reflects its financial openness. Before the financial crisis in 2007, lending peaked at an external debt to GDP ratio of 369%. However, lot of foreign institutions and private investors heavily speculated with debt in denominated Swiss Francs. As financial crisis worsened, the Swiss currency soared which ultimately let foreign obligor’s burden of debt rise. In particular, Polish and Hungarian private households had great amount of Swiss Franc mortgages and thereupon suffered financially from the Swiss Franc appreciation in early 2015 (Financial Times, 2015a). Despite the fact that foreign debt to GDP has decreased as part of a strengthened Swiss Franc, the overall proportion of external debt to GDP is still on a global scale relatively high.

This shows the financial openness of the Swiss economy and hence gives the Swiss Franc as a currency haven ultimately more credit.

After discussing Habib & Stracca’s (2011) safe haven characteristics, one can find clear evidence for the Swiss Franc as a safe haven currency. Solely the small economic size discloses some minor weaknesses while the other characteristics with the political and regulatory framework, the financial market openness as well as financial vulnerability give strong support for safe-haven seeking investors. This is also fortified by the strong credit rating where all three major credit rating agencies give Switzerland the highest possible rating with AAA (Tradingeconomics, 2016).

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3.1.2 The monetary policy of the Swiss National Bank

The Swiss National Bank: Aims & Strategy

With the foundation of the Swiss National Bank (SNB) in 1907, overall direct monetary operating activities commenced in Switzerland after the introduction of the National Bank Law in the same year (Pohl & Freitag, 1994). As the sole central bank of Switzerland, the SNB independently governs the Swiss monetary policy. Thereby, the central bank has to obey the law and its constitution as well as act on behalf of the Swiss nation. The SNB is formed as a joint-stock company under special statue. The monetary authority is monitored and partly governed by the Swiss federal government. The stock capital amounts to 25 million CHF and is majority held by public institutions. However, the government does not hold any central bank stocks. 55% of the SNB stocks is owned by the Swiss cantons, Swiss cantonal banks as well as other cantonal institutions. The minority is possessed by private investors that seek for dividends up to 6%.

Despite the fact that it legally acts as a stock corporation with lucrative dividend payouts, the prior aim is to guarantee price stability where growth for the whole economy can be facilitated. Through such goals, the overall economic framework is constructed so that the development of the Swiss economy can flourish on a long-term horizon (SNB, 2016).

In order to realize such vital economic goals, a consistent strategy aligned to SNB’s objectives is needed. Thereby, the monetary strategy of the SNB consists out of three interdependent pillars. First of all, the SNB preserves its policy in order that price stability can be assured. Through this aspect, economic development and prosperity is realized as the Swiss economic system can maximize its productivity levels in the medium as well as in the long-term. Second, the monetary decision-taking is made in accordance to its mid-term inflationary projection. Such calibration is crucial to avoid any unforeseen hyperinflation which could harm economic growth. The third strategic pillar, the SNB determines a reference interest rate for its target range. It is the three-month Libor rate for CHF deposits (SNB, 2016). With such a strategic target range, the central bank has room for manoeuvre when interest alignment is needed to counteract capital flows. All three discussed monetary execution methods of the SNB guide and impact the Swiss economy. With such aspects, international competitiveness for Swiss enterprises and industries is promised. In the following section, the strategy will be more stressed as the strategic execution in form of monetary policy making is analysed. Based on this, the foreign exchange movements of the Swiss Franc since the financial crisis are described.

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The evolution of the Swiss Franc since the financial crisis

With the start of the financial crisis in 2008, the Swiss Franc became more appealing for investors that seek for investment alternatives in times of turmoil. As the Swiss Franc possesses several discussed safe haven characteristics, it can influence investments in such countercyclical currencies.

Though, at the end supply and demand of the Swiss Franc determines the lucrativeness.

This is also graphically pictured in figure 3 below with the USD/CHF and EUR/CHF relationship, which are the two most crucial currencies for exports. Since the beginning of 2008 until the end of 2015, the Swiss Franc appreciated by 52.4% to the Euro while the Swiss Franc modestly appreciated 13.6% against the US Dollar (Oanda, 2016).

Figure 3: Foreign Exchange Rate Movements since 2008

Data source: Bloomberg, 2016.

Though, with the attraction of safe haven investors, also downsides for the Swiss economy emerged. A rising Swiss Franc against other major currencies like the Euro and the US Dollar can make the Swiss Franc more vulnerable. With a rise, Swiss exports became more expensive. As also other issues emerged with a mounting currency, the SNB implemented countervailing measures to retain the competitiveness of the Swiss economy in an international context.

The impact of Swiss Franc appreciation on the performance of the export-oriented Swiss watch industry