Switzerland could adopt all the sanctions that the European Union has imposed on Russian people and companies and freeze their assets to punish the invasion of Ukraine. Photo: SNB

nergy prices have surged, stocks have slumped, and much more. The key for investors is not just to try to monitor and manage this volatility, but also to look out for any more tail risks that develop rather more slowly. These include stresses such as funding pressures, liquidity shortages, and even bank runs.

The key question here is, what happens when you effectively cut the 11th largest economy in the world out of the global financial system? Does this cause intolerable strains in key parts of the system? So far, the signs are good. Central bankers in many countries, including the US, have declared that their financial systems are working normally. Gauges of market pressure such as cross currency basis swaps, libor-OIS spreads and more suggest that there has been some tension, but certainly not at a level to suggest that major problems have developed so far. Of course, this could all change, and there will be many places where traders and investors will be looking to try to work out if this is happening.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said one interesting area of tension is in Switzerland. This is for a number of reasons. The first is the apparent significance of Switzerland as a home for Russian deposits. Another is the possibility of a surge in the Swiss franc thanks to the currency’s safe-haven status. The euro/Swiss has already fallen to the lowest levels since the tumult back in early 2015 when the Swiss National Bank (SNB) abandoned the 1.20 euro/Swiss floor; a decision that saw the euro plunge from 1.20 to well below parity before bouncing back. Fast-forward to today, and the euro/Swiss is falling headlong towards the parity level again. This raises the spectre of hefty SNB intervention and, while this might actually serve to ease financial market strains by avoiding more significant euro (and perhaps even dollar) weakness against the franc, we do have to bear in mind that if intervention is concentrated against the euro, the rebalancing of these reserves could imply some hefty dollar purchases and euro sales.

Conversely, the very sharp rise in Swiss inflation, up to 2.2% in February, could make the SNB far more reticent to intervene, as it welcomes the fact that a certain amount of franc strength can help to quell imported inflation. Indeed, there have been some signs for a while now that the SNB may have turned a little less enthusiastic about intervention. Should this be the case, and should the euro/Swiss encounter very little resistance in a move that takes it to, and through, parity, there could be additional angst in the wider FX market over concerns that central banks (or at least the SNB) appear overpowered.

"Our view has been for some time that a test of parity is coming, and it now appears pretty close. We do think, however, that the SNB will be able to repel pressure for a significant dive below the parity level, should it choose to do so. But much depends not only on the SNB’s willingness to act but also on the development of the Russia-Ukraine conflict. For if this escalates into a far more dangerous situation, with Russia threatening other close neighbors of Ukraine, for example, all bets are off when it comes to a drop in euro/Swiss parity.All of what we’ve just talked about only covers the issue of the euro and Swiss and how this might spillover to other currencies", Mr. Steve Barrow stressed.

However, there are far more implications of the Ukraine conflict to think about, such as the impact on the Swiss banking system should large international holders of deposits or other assets fear that Switzerland’s notable reputation for banking secrecy has been undermined by its decision to join in with sanctions against Russia. Only time will tell whether there are more significant reverberations for the Swiss financial system than we are seeing today; a fact that’s the same for others as well. However, given the small size of the Swiss economy and the large size of its banking system, we would not be at all surprised if some of the future tensions that we are likely to see are played out here.