On Monday morning, you only had to pay 94 Swiss franc cents for one euro: a new record. After years of trying to depreciate the franc, the Swiss National Bank has done a 180-degree turn in recent months. Faced with galloping inflation, it is now allowing the national currency to appreciate.
Still trading at 1.03 francs per euro at the beginning of the year, the Swiss currency accelerated on June 16, following the first rise in the reference rate by the Swiss issuing institution after years of stability. At the end of June, the currency pair fell below parity and by Monday morning it had reached a new record low of 0.9409 francs/euro.
The chairman of the SNB board, Thomas Jordan, had set fire to gunpowder in mid-June by declaring that “should the franc weaken, we would instead consider selling foreign exchange” to keep the franc strong. This message was repeated last Thursday, with the abandonment of negative key interest rates that rose 0.75 percentage points to +0.50%.
“Before, the SNB intervened to reduce the upward pressure on the franc, now it can intervene to reinforce the appreciation of the franc and reduce inflationary pressures”, summarizes Nikolay Markov. For the senior economist at Pictet Asset Management, “there is no longer that fear that the franc will appreciate. On the contrary, the appreciation of the franc is welcome as it makes it possible to limit the rate hikes necessary for price stability”.
a buffer role
Indeed, Switzerland posted a record inflation rate in August of 3.5%, well above the SNB’s price stability target of between 0% and 2%. “If we remove regulated prices, inflation amounts to 4.1%, that is, a rate twice higher than the SNB’s price stability target,” calculates Alix Bhend-Lambin, financial strategist economist at the BCV.
However, this is significantly lower than the 9.1% registered in August in the euro zone and 8.3% in the United States. In fact, the strength of the franc partially protects against an excessive acceleration in prices thanks to the purchasing power that the Swiss currency confers for purchases abroad, in particular for energy products. A 10% drop in the euro-franc exchange rate reduces inflation in Switzerland by half a percentage point, according to Credit Suisse estimates.
“The franc plays (…) its role as a buffer for import prices, but it has not prevented export prices (+1.3%) from increasing. The Swiss currency is helping to reduce costs for companies” , says Alix Bhendlambin For the latter, “the franc is not so overvalued: the fair value against the euro is 1.08 euro/franc”.
Faced with this development, how low is the currency pair likely to sink? “In absolute terms, there is no limit to the appreciation of the franc. However, there is a limit to the speed of this trend,” warns Nikolay Markov. If the franc appreciates too quickly, the SNB could intervene to reduce the Swiss currency’s rate of appreciation, he believes.
“Too rapid an appreciation would penalize the price competitiveness of exports, despite the high-end positioning of our industry,” says Arthur Jurus, senior strategist at Oddo-BHF Switzerland. According to the latter, the franc is structurally appreciating against the euro due to rising price differentials.
Given this situation, the specialist at the Banque cantonale vaudoise anticipates the euro-franc currency pair at 0.98 in six months, “in any case below parity.” “The rest will depend a lot on the context, because there are a lot of uncertainties,” he warns.
As for Nikolay Markov, he expects the franc to depreciate next year against the euro, “because the market environment should relax.” For December 2023, he anticipates a level of 1.05 francs per euro before the franc strengthens again in 2024.
And for Arthur Jurus, the appreciation in the medium term should continue and take the currency pair to 0.85 euro/franc in five years, reflecting “the macro-financial fundamentals currently observed”.