The recent fall in the Swiss franc against the euro will be music to the SNB’s ears, and we think that there is plenty of scope for the currency to drift lower over the coming years.
- The recent fall in the Swiss franc against the euro will be music to the SNB’s ears, and we think that there is plenty of scope for the currency to drift lower over the coming years.
- Having traded in a narrow range around CHF 1.08 over the past six months or so, the Swiss franc has dropped sharply against the euro since the start of last week. It fell below our end-2021 forecast of CHF 1.10 in trading this morning and is now close to levels last seen in December 2019. (See Chart 1.)
- The sell-off can’t be pinned on changes in interest rate differentials. In fact, if anything, the recent tick-up in the 2-year Swiss OIS rate might have been expected to boost the franc. (Again, see Chart 1.) Moreover, while the SNB intervened heavily to counter upward pressure on the franc last year, the weekly sight deposit data suggest that it has largely been out of the market since. (See Chart 2.)
- The fall in the franc instead appears to be a symptom of the wider risk-on backdrop in markets and reflation trade, which has been reflected in rising government bond yields and a rotation from momentum towards value stocks. As was the case on “Vaccine Monday” in November last year, the recent drop against the euro has coincided with a period of value stock outperformance. (See Chart 3.)
- Admittedly, the latest sell-off may have been exacerbated by technical selling, perhaps triggered by the breaching of the CHF 1.09 level on Monday. For what it’s worth, the franc has edged higher since bottoming out at CHF 1.1052 this morning. Nonetheless, while we are loath to ditch our end-year forecast of CHF 1.10 just yet, our view that risky assets will fare well over the next couple of years suggests that the balance of risks is skewed towards further franc weakness. Note that even after its recent fall, the franc is still about 9% stronger against the euro than the low reached in May 2018.
- So what does this mean for the SNB? At the very least it will make the game of “how will policymakers describe the franc?” more interesting at the Bank’s meetings this year, even if the smart money is on it sticking with the tried-and-tested “highly valued” formulation for the time being. (See Chart 4.) Linguistic frivolities aside, the SNB will be very happy to let the franc drift lower and the prospect of it staying on the side-lines of the FX market will help to keep the US Treasury off its back. (See here.)
Chart 1: Swiss Francs per Euro & OIS Rate Differential
Chart 2: Swiss Francs per Euro & SNB Intervention Proxy
Chart 3: Swiss Francs per Euro & MSCI World Ratio
Chart 4: Swiss Franc Exchange Rates & SNB Language
Sources: Refinitiv, SNB, Capital Economics
David Oxley, Senior Europe Economist, firstname.lastname@example.org