Time is nigh for a Swiss franc fall
Analysts pronounce an imminent end to the Swiss franc bull run, citing new safe-haven trades and the global economic recovery.
The Street doesn’t like to admit when it’s wrong, but last year it most definitely got it wrong when it came to the Swiss franc.
Foreign-exchange analysts forecast the time was nigh for sustained weakness in the safe-haven currency, but, aside from a temporary tumble in the third quarter of 2013, the Swiss franc held its ground against leading currencies.
Low volatility remains the flavour of the day. As of Friday, EUR/CHF is trading at 1.22 and EUR/USD is at 0.88 – during the past 12 months, the Swiss franc is up 7.3% against the US dollar and 1% versus the euro, according to Canadian bank Scotiabank.
However, now analysts are convinced 2014 is the year for the Swiss franc to take a fall, as global events overtake its status as a safe-haven currency and investors seek new avenues to put their money to work.
The Swiss franc has developed a reputation as Europe’s most benign currency, since Switzerland’s central bank announced a floor in September 2011 to ensure EUR/CHF never falls below 1.20.
The Swiss National Bank (SNB) became concerned the currency was rapidly appreciating, as investors poured money into the safe Swissie when events in Europe took a turn for the worse.
The central bank has since spent billions buying foreign currencies to keep the 1.20 floor intact, and it has, by and large, worked.
“The market has generally accepted the level of the Swiss franc against the euro, and there is not much pressure in either direction,” says Paul Chappell, founder and chief investment officer of investment advisory service and portfolio management company C-View.
However, analysts believe the Swiss franc will finally start to gradually weaken against the euro and US dollar this year, as the global economy improves and shows sustainable growth.
Analysts incorrectly predicted 2013 would herald a flight away from safe-haven assets, such as the Swiss franc, and into riskier assets, such as European peripheral debt, but there were still inflows into the currency from worried investors.
This year, however, investors have had a change of heart. European peripheral debt is now one of the most overcrowded trades – after US high yield – according to an April fund manager survey from Bank of America Merrill Lynch Global Research, involving 239 panellists that manage $674 billion of assets.
“We are seeing a massive return of confidence in the eurozone, which is enticing Swiss investors to put their money into the periphery eurozone and [other foreign assets],” says Vasileios Gkionakis, global head of FX strategy at UniCredit Bank.
Add UniCredit analysts: “The ongoing normalization in European periphery spreads should now start translating into a meaningful pick-up in Swiss net lending abroad and hence put upward pressure on EUR-CHF.”
C-View predicts the US economy will outperform its G7 peers during the next 12 months, and thus forecasts the Swiss franc to be somewhat cheaper against the dollar.
“A rebound in US economic activity could see the dollar strengthen against the Swiss franc,” says C-View’s Chappell.
Investors wishing to capitalize on this prediction could position themselves to be long US dollar and short Swiss franc, according to Dag Muller, technical analyst at Swedish bank SEB.
Another popular short-term trade among investors is to be long the New Zealand dollar and short Swiss franc, although the New Zealand dollar is considered to be overvalued in the long term.
However, while analysts might be quietly confident the Swiss franc will weaken over time, they are still wary of a few immediate dangers that could drive investors back towards the Swiss franc. Geopolitical risk is high on investors’ agenda.
“The Swiss franc will not weaken should conditions deteriorate sharply in Ukraine [and we see] sanctions against Russia,” says Muller. “There are risks for military intervention from both sides.”
One thing FX analysts can agree on though is that the SNB-imposed floor is here to stay, regardless of whether the franc weakens. The SNB will maintain its floor against the euro as, in the eyes of the central bank, the currency is still seen as high, says Camilla Sutton, chief currency strategist at Scotiabank.
The SNB’s vice-chairman Jean-Pierre Danthine told Swiss newspaper SonntagsBlick in February that the floor will remain for the “foreseeable future” to maintain price stability in the country.
“Inflation is non-existent and geopolitical risks that could drive franc flows are ever present,” says Scotiabank’s Sutton.