Swiss Franc CHF – an estimation by Ebury London

Since TextileFuture has its roots in Switzerland, we would like to bring you the evaluation of the Swiss Franc (CHF) and its future a bit nearer by making use of an Ebury Report from London.  We try to make a series on various important currencies of the world, and we are very thankful to Ebury to start the series with the Swiss Franc.

In the U.S. the Swiss National Bank’s policy to weaken the outside value of the Swiss Franc in order to allow exporters to follow their business course. This policy got Switzerland on the list of the currency manipulators under the presidency of Trump, in company with China and some other countries. We have thouroughly studied the evaluation of the Swiss Franc by Ebury and we feel that it is fair and comprehensive.

We wish to add that the financial ties with Great Britain since the Brexit are getting closer with Switzerland, since the two are important financial centres. The EU denied Switzerland the recognition of equivalence of its financial place over a political controversy and the further collaboration with the EU. However Great Britain has already accepted the recognition of equivalence of the Swiss financial place, thus further collaboration in this field might occur in the future.

The feature starts here:

Swiss Franc CHF – an estimation by Ebury London

Alongside its fellow safe-havens, the US Dollar and Japanese yen, the Swiss franc (CHF) was one of the main beneficiaries of the market panic and uncertainty created by the initial outbreak of the COVID-19 pandemic in the first quarter of last year.

The Franc rallied sharply at the onset of the crisis, even amid large-scale intervention from the Swiss National Bank designed to lessen CHF appreciation. Since its lowest point in May, the EUR/CHF cross has, however, moved higher, with the pair now trading roughly in line with our forecasts around the 1.08 level (Figure 1). The currency is also now trading in excess of 10 % higher versus the boradly weaker US dollar over a one-year period, a rally that is around double the pace witnessed in the yen during that time.

As one of the lower risk currencies in the G10, the franc has been driven largely by shifts in global market sentiment since the beginning of the COVID-19 pandemic.

Aside from the yen and the US dollar, the franc has been the worst performer in the G10 since mid-May, during a period largely characterised by ‘risk on’ trading. This move lower in CHF has accelerated since early-November, first following the outcome of the US election and then news of progress towards multiple COVID-19 vaccines. While progress towards mass vaccination is undoubtedly a positive for the Swis economy, we think that it is a negative development for the franc, given the currency’s safe-haven status.

As we noted in our 2021 preview report, we also think that the Swiss economy looks set to receive less o a boost from an unwinding in virus restrictions this year compared to many of its peers. Overall cases of the virus per capita have actually been quite high in Switzerland relative to much of Europa (approximately 55000 per 1 million people), as have deaths (945 per 1M), particularly during the second wave of infection. We do note, however, that the restrictions imposed by the Swiss government have been much less severe. According to Oxford University’s COVID-19 government response stringency indices, the containment measures imposed by Swiss authorities have been the fourth most lenient in the G10 since the start of the crisis. Moreover, Switzerland has also so far ordered less vaccine doses per head than the Euro Area (1.9 vs. 3.3), and the second lowest in the G10 behind Norway.

In response to the crisis, the Swiss National Bank (SNB) has had no room whatsoever to lower interest rates, given that they were already deep in negative territory prior to the pandemic. Instead, the main tool left in the SNB’s armoury has been FX intervention, both direct in the form of FX purchases and indirect verbal intervention. The SNB intervened aggressively during the early stages of the crisis in an attempt to weaken the franc. The most timely measures of the SNB’s intervention efforts is the data on total sight deposits, which serve as a decent proxy for the bank’s overall foreign currency purchases. Sight deposits jumped by the largest amount since the removal of the EUR/CHF currency peg in January 2015 in May last year (Figure 3), with the SNB estimated to have spent 90 billion Swiss francs in the first half of the 2020 alone in order to weaken the currency.

Appreciating pressure on the Franc has, however, eased significantly since mid-2020, with investors instead favouring risky currencies. Sight deposits even declined in the fourth quarter of last year, although FX reserves held at the central bank remain considerably higher for the year at approximately 134 % of GDP.

Preventing a significant appreciation in the franc is the key policy tool at the SNB’s disposal. A heavy dependence on exports (approximately two-thirds of GDP) means that as stronger currency is an issue for the central bank given its impact on worsening export competitiveness. In his recent communications, SNB chairman Thomas Jordan has said that the bank will continue to be active in the FX market, despite being labelled a currency manipulator by the US. Jordan has also continued to reiterate that the franc remains ‘highly valued’. 

The SNB’s accommodative monetary policy stance, combined with fiscal support from the Swiss government, have softened the blow on the economy during the pandemic period. The contraction in the Swiss economy in the second quarter of last year was far more mild than almost every other developed nation (-7% quarter-on-quarter). It also rebounded impressively in Q3 (+7.2% QoQ), ensuring that the economy was much closer to its pre-pandemic size at the end of September than all of the largest four economies in the Euro Area. Switzerland’s dominant export industry has held up well under the circumstances, partly due to the large orientation towards pharmaceuticals. Growth is set to have slowed in the fourth quarter, although the more sporadic nature of restrictions enforced in Switzerland means we think that the Swiss economy will again outperform its Euro Area counterpart.

We remain of the view that the Swiss National Bank will continue to intervene in the FX market and prevent a meaningful appreciation in CHF below current levels in 2021, particularly with inflation still deep in negative territory (-0.8% MoM in December). Our optimistic view towards vaccinations and the global economy this year does, however, ensure that we think intervention will become increasingly less necessary as appreciating pressure on the franc eases. We instead foresee gradual losses for the franc against the euro over our forecast horizon with a return to more normal levels of global economic activity likely to lessen the appeal of safe-haven assets in 2021.

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