‘Swiss Made’ may mean more expensive now

After this week's drastic policy adjustment in the exchange rate between the franc and the Euro by the SNB, now comes the fallout in the terms of trade between Switzerland and the Eurozone reported here at The Indian Express:

Swiss Made has traditionally stood for quality, precision and reliability. But after a shock move to scrap the cap on the franc, it could convey a less attractive message: Made more expensive. 

The decision by the Swiss National Bank, after three years of holding down the franc’s value, was met with indignation by many small-to-mid size companies which now face lower revenue from exports. 

“I trust you have a strong plan that will help all of us in the long run,” Edouard Meylan, chief executive of watchmaker H. Moser Cie wrote in a scathing open letter to the SNB President Thomas Jordan, saying he had already received calls from retailers cancelling orders. 

Nicholas Ebisch, currency analyst at Caxton FX, said Swiss companies’ products were now between 10 and 40 per cent more expensive than earlier in the week due to the SNB’s move. 

Medical technology companies — another niche area where Switzerland excels —are also expected to feel the pain. Dental implant maker Straumann could be one of the worst affected, since almost two-thirds of its production costs are in francs, according to estimates by analysts at Sanford C. Bernstein. In contrast, 40 per cent of its sales are in euros.

So let's see if the Swiss exporters respond to this new exchange rate policy at the SNB by reducing the cost of their wares in Euro terms in order to maintain previous unit sales levels.

And then further, if this potential move by Swiss exporters of reducing the price for their wares in Euro terms will then have a follow on effect of weakening the Swiss currency back towards where it was before the removal of the peg at the SNB.

Neil Wilson has a nice post over at 3Spoken here that goes into the general dynamic aspects of these types of import/export transactions and identifies the different entities that participate in these commercial activities.

Using the emerging Swiss/Euro situation as a real world example, we may be able to assess what would be in the self-interest of these entities participating in these transactions and hence what may happen to the currency exchange rate of the two nations engaged in the trade when prices of their goods are greatly reduced by the exporters and the banks engaged in financing the trade have to respond to these price cuts in the exported goods.