The point about long-term yields and safe-haven dynamics aligns well with the observed decoupling of short-term rates and FX moves — especially in risk-off episodes.
One question: Did you consider incorporating balance sheet variables (e.g. central bank asset purchases or reserve accumulation) as a proxy for monetary stance asymmetries between SNB and ECB? Given the SNB’s past FX interventions and balance sheet sensitivity, that might capture additional explanatory power beyond yield curve slope alone."
Thank you Stefan - have you considered what a similar analysis would show when adjusted for inflation rates, i.e. using real rather than nominal rates?
It is often argued that real interest rates matter for exchange rates and capital flows. I have never understood why. Suppose you are an investor based outside Switzerland, say in the UK. By shifting your assets into Swiss francs, you earn the Swiss franc interest rate. But since you continue to consume UK goods, it is UK inflation—not Swiss inflation—that determines the real return on your investment.
The point about long-term yields and safe-haven dynamics aligns well with the observed decoupling of short-term rates and FX moves — especially in risk-off episodes.
One question: Did you consider incorporating balance sheet variables (e.g. central bank asset purchases or reserve accumulation) as a proxy for monetary stance asymmetries between SNB and ECB? Given the SNB’s past FX interventions and balance sheet sensitivity, that might capture additional explanatory power beyond yield curve slope alone."
Good point! This will be in the follow up piece that comes on Monday.
Thank you Stefan - have you considered what a similar analysis would show when adjusted for inflation rates, i.e. using real rather than nominal rates?
It is often argued that real interest rates matter for exchange rates and capital flows. I have never understood why. Suppose you are an investor based outside Switzerland, say in the UK. By shifting your assets into Swiss francs, you earn the Swiss franc interest rate. But since you continue to consume UK goods, it is UK inflation—not Swiss inflation—that determines the real return on your investment.