Switzerland’s Dilemma is perhaps unique in these markets. Traders in other markets are taking shelter in the safety of Swiss francs. Swiss currency appreciated rapidly in this year creating undesirable effects for the Swiss economy. Now the country wants to devalue its currency. In a unique case they have very limited options.

Swiss economy is not large so there is limited scope to influence its currency using domestic monetary policy tools. Switzerland has always been a nation of surplus budgets (latest figures 8.7% of GDP). So the domestic government bond market is too small to have any meaningful impact on the domestic interest rates. The domestic corporate bond market is not very large either. The only logical step the central bank has is to sell swiss francs and buy foreign bonds.

But the paradox here is that normally the countries with fiscal deficits devalue their currency. What happens when a country with large fiscal surplus tries to devalue its currency. It might only lead to further imbalances in the global currency markets.

More importantly, traders will find some other safe currency if it is not Swiss francs. Do Swiss want this.