WITH the end of the Davos conference last week, the Swiss franc lost 1.27 per cent of its value. While it would be nice to think of that as the direct result of thousands of politicians, financiers and journalists leaving, and so ending their spending on hotels, booze and so on, the reality was more prosaic. Slightly higher than expected inflation in the Eurozone led traders to wonder whether an interest rate increase might be around the corner, while safe haven traders pulled back slightly as the fear of Egypt’s protesters disrupting the wider economy subsided.
But the Swiss franc’s role as a safe currency is a relatively new one. As analysts at Societe Generale point out, until the financial crisis, the Swiss franc was a “virtually riskless currency” against the euro. Swiss franc denominated mortgages to capitalise on lower rates were common, as were cross border bank accounts.
When the crisis began, however, the franc sharply appreciated against most currencies, by about 10 per cent. Since the start of the sovereign debt crises last May, it has climbed further, while franc-euro volatility leapt up dramatically (see chart). The franc is now about 30 per cent stronger against the euro than it was in October 2008, while intraday movements are much larger.
However, relatively strong Eurozone growth, together with strong commitments from China and Japan, seem recently to have settled markets’ worries about sovereign debt. As a result, Societe Generale is going short on volatility. They argue that Middle Eastern escalation aside, the franc ought to settle at a lower level than it is currently as European worries continue to dissipate.
Stephen Gallo, an analyst at Schneider Foreign Exchange, disagrees. He argues that the franc is “set to do well”. Gallo argues that “the chance of a market-led decline is low,” because inflation is low and because the Swiss National Bank (SNB) will eventually have to raise interest rates. “The SNB is in a political bind – it wants to support its exporters, but money supply growth is in rate hike territory.”
Gallo believes that the SNB will probably let the European Central Bank (ECB) take the lead in monetary tightening, thereby allowing the franc to fall relatively. But he also warns that the Bank may be tempted into intervening to push down the franc, especially if franc strength seems to be weighing on Swiss competitiveness. So while a market-led decline in the Swiss franc might be unlikely, a central bank-led one cannot be ruled out. As Richard Wiltshire of ETX Capital, warns, “Swissie strength is becoming a political issue in Switzerland. We may hear some rhetoric from the SNB or see them flex their muscles in the coming weeks.”
So though Davos may be over, traders would do well to keep watching Switzerland.