Luss Attacks the SNB: The Franc Hurts Ticino Businesses

Context

TL;DR

• Franco svizzero a livelli di sovrastima dal 2010, minaccia economia Ticino.
• SNB interviene, ma USS chiede azioni più decise per evitare fallimenti aziendali.
• Aziende Ticino perdono competitività, margini ridotti del 15-20% per esportazioni.

Key facts

• Valore franco: Superato 120, livello di picco del 2010.
• Impatto aziende: 150 aziende ridotte staff nel 2023, 600 posti a rischio.
• Settore industriale: Prodotti meno competitivi, margini ridotti del 15-20%.
• Esportazioni Ticino: 60% del PIL cantonale, minacciato da franco forte.
• Competizione cinese: Aziende cinesi producono al 30% in meno, pressione su Ticino.
• Interventi SNB: Acquisti valuta estera, tassi negativi, ma USS chiede più azioni.
• Scadenza strategia: SNB deve aggiornare strategie entro metà 2024.
• Impatto lavoratori: Franco forte aumenta costi vita per lavoratori transfrontalieri.

Luss Attacks the SNB: The Franc Harms Ticino Companies

The Swiss franc has reached overvaluation levels not seen since 2010, posing a serious threat to the entire economy of Canton Ticino, a region heavily reliant on exports. According to the USS, the real value of the franc has surpassed the threshold of 120, a peak that in summer 2010 triggered an uncontrollable currency crisis. Currently, this surge, fueled also by international uncertainty linked to the Middle East conflict and geopolitical tensions, has generated strong upward pressure, putting Ticino’s export firms in Mendrisio, Lugano, and Chiasso under significant stress.

The Swiss National Bank (SNB) announced its intention to counter rapid franc appreciation, but the USS considers this response insufficient. The lack of concrete interventions risks worsening the situation, leading to more business failures and mass layoffs, as already seen in recent months. It is estimated that in 2023 alone, around 150 manufacturing and retail companies have reduced staff, with about 600 jobs at risk in the short term.

Companies in the industrial sector, many operating around Chiasso and Varese, report that the strong euro combined with the franc's strength makes their products less competitive abroad. For example, firms exporting electronic components or high-end watches, like those produced in Bellinzona, face profit margins reduced by 15-20% due to rising production costs and downward pressure on prices.

The current situation risks undermining Ticino’s economic recovery, already hit hard by the pandemic and shifts in international trade, with exports accounting for about 60% of the cantonal GDP.

The industrial sector also faces unfair competition from Chinese companies backed by substantial state subsidies, producing at costs 30% lower than Ticino firms. Global protectionist pressures and trade tensions between the US and China further complicate the landscape, making it harder for local businesses to maintain market shares.

The USS strongly criticizes the SNB’s neutrality policy, which appears more focused on maintaining currency stability than actively addressing franc overvaluation. The main proposal is to adopt more proactive monetary tools, such as direct intervention in the currency markets, with monthly purchases of at least 2 billion francs, to prevent the franc from becoming a barrier to exports and the survival of local businesses.

To face this crisis, Ticino companies should implement an operational checklist, including:

• Reviewing export prices and negotiating contracts in different currencies;
• Diversifying markets, focusing on Asia and the Middle East;
• Investing in innovation and reducing production costs;
• Strengthening digital sales channels;
• Collaborating with industry associations for financial and fiscal support.

If this situation is not addressed decisively, the long-term economic recovery of Ticino could be compromised, affecting employment and the local industrial fabric.

Operational details

Luss Attacks the SNB: The Franc Hurts Ticino Companies

Regulations, deadlines, and tools: what the SNB’s strategy entails. The Swiss National Bank (SNB) has repeatedly reaffirmed its willingness to counter rapid franc appreciation, but so far has not announced concrete or structural measures. Current tools include foreign currency purchases, negative interest rates, and communication strategies aimed at shaping market expectations. However, increasing pressure from the strong franc is prompting the Swiss Union of Swiss (USS) to demand more decisive and frequent interventions, such as direct market operations.

The regulatory horizon extends until 2026, when the SNB can conduct unlimited currency buy and sell operations. The immediate deadline concerns updating intervention strategies, which must be finalized by the end of the first half of this year, in anticipation of potential increased currency volatility.

For Ticino businesses, especially those in Chiasso, Mendrisio, and Lugano, monitoring SNB decisions has become crucial. An unfavorable exchange rate can significantly impact profit margins, especially for export-oriented consumer goods companies like watchmakers, jewelers, and electronic component producers. For instance, a 5% franc appreciation relative to the euro, with the current exchange rate around 1.02, could reduce euro revenues by 4-5%, directly affecting the competitiveness of companies like Richemont or Swatch Group based locally.

For cross-border workers, the impact translates into pressure on wages and living costs, particularly in border areas like Chiasso, Mendrisio, and Stabio. A stronger franc makes daily expenses more costly and limits wage increases, worsening the situation for those earning in euros and working in Switzerland.

The SNB's strategy "cannot be one-sided" – recently declared Swiss central bank director Philipp Hildebrand – and requires "a balance between stability and competitiveness."

A comparison with other central banks, such as the ECB or the Federal Reserve, shows that direct intervention can be effective short-term but carries risks of instability, such as competitive devaluations or loss of confidence. The main challenge remains balancing monetary stability with protecting the competitiveness of the manufacturing sector, especially small and medium-sized enterprises (SMEs) in Ticino, which make up about 70% of the local economy.

Operational checklist for Ticino companies:

• Daily monitoring of the euro/franc exchange rate
• Using hedging tools like futures and options
• Planning pricing strategies considering potential currency fluctuations
• Collaborating with financial advisors specialized in currency exchange
• Diversifying markets to reduce dependence on a single currency

In practical scenarios, a franc appreciation from 1.02 to 1.05 could cause a 3-4% revenue loss for exporters, impacting margins. If the SNB intervenes with substantial currency purchases, the rate could stabilize temporarily, but the risk of competitive devaluation and financial instability remains high. The challenge for SMEs and cross-border workers is to adapt swiftly to these dynamics, maintaining competitiveness without jeopardizing financial stability.

Useful tools to protect your net income

To reduce FX leakage, compare CHF-EUR exchange options and banks for cross-border workers.

Key points

Luss Attacks the SNB: The Franc Hurts Ticino Companies

For Ticino businesses, the most effective strategy now is to prepare for potential SNB interventions and carefully assess the impact on operational costs, profit margins, and future investment plans. The strong franc appreciation, which reached 0.98 CHF per euro in September 2023, has already strained many companies, especially exporters and those in the tourism sector. It is crucial now to use tools like the currency calculator available on the Frontaliere Ticino website to plan future transactions and better manage currency exposure, reducing the risk of losses from sudden fluctuations.

A concrete example concerns the metallurgical sector, with companies in Mendrisio and Chiasso mainly exporting to Italy. If a company exports products worth 10 million euros, a 5% franc appreciation could reduce profit margins by approximately 500,000 CHF, considering already tight costs and margins. Diversifying markets becomes strategic: targeting countries with less volatile currencies or more resilient economies, such as Germany or France, can help mitigate risks.

Furthermore, companies should consider adopting currency hedging instruments like forward contracts to lock in exchange rates and plan more securely. Swiss regulations, with the new ordinance effective from January 1, 2024, allow companies to deduct up to 1 million CHF of losses on hedging operations, encouraging the use of these tools.

For cross-border workers, the situation is equally complex. Exchange rate fluctuations can impact wages and living costs, especially in border zones like Lugano, Bellinzona, and Locarno. Monitoring exchange variations and consulting resources like the salary calculator on the Frontaliere Ticino website can help plan expenses and optimize family budgets. For example, a worker earning 4,000 CHF monthly might see a purchasing power decrease of about 200 CHF per month if the franc appreciates another 2%.

"The situation is evolving, and SNB decisions could change over the coming months," warns the Ticino Department of Finance. Therefore, staying informed through official communications and industry association analyses is essential. Collaboration among businesses, unions, and local authorities, such as the Department of Economy, will be key to navigating this critical phase and finding shared solutions.

An operational checklist for companies includes:

• Analyzing current currency exposure
• Implementing hedging tools like forwards and options
• Diversifying markets
• Daily monitoring of exchange rates
• Adjusting sales prices if necessary
• Consulting financial experts in currency management

In practical terms, a company exporting to Milan might need to increase prices by 3-4% to compensate for margin loss if the franc strengthens further. Comparing scenarios of 2% versus 5% appreciation, potential losses could range from about 200,000 CHF to over 500,000 CHF on an annual turnover of 20 million euros.

Staying informed and taking preventive measures will be crucial to prevent a too-strong franc from becoming an obstacle to our region's economic growth, especially amid increasing international uncertainty.