In recent weeks, the franc has regained significant value. The Swiss currency has even reached its highest level in almost three years for the euro. Four reasons why the franc is strengthening:
The political uncertainty
For a long time, the trade dispute between the United States and China caused uncertainty on the stock exchanges. But now, thanks to the signing of a first partial agreement, the signs are pointing to easing again, which is causing global share prices to rise. However, the US-Iran crisis came to a head at the beginning of the year after US forces killed a top Iranian general with a targeted drone attack. This worried investors and increased the demand for “escape currencies” such as the Swiss franc, said Credit Suisse analyst Maxime Botteron. There was therefore no worry-free phase on the financial markets in which the Swiss franc could have weakened. Over the past few years, it has often been crises in the euro zone that have prompted investors to flee to the safe haven of Franconia. “The reasons for the appreciation of the Swiss franc are changing like a relay race,” says a financial analyst.
—
Stability and low inflation
The franc has established its reputation as a safe haven over the decades. The background for this is economic and political stability as well as low inflation. According to the St. Gallen Cantonal Bank, the currency is also suitable as a target for foreign exchange speculators: Because the Swiss franc is a “small currency” in international comparison, a small price can be used to achieve a strong price effect, according to the experts at the Cantonal Bank.
—
Interest rate differentials became smaller
The Swiss central bank has maintained its monetary policy unchanged for five years: the key interest rate is minus 0.75 percent, and if necessary the SNB is ready to intervene in the foreign exchange market to artificially weaken the franc. In general, the central bank wants to keep interest rates lower in Switzerland than in other important currency areas in order to make the franc unattractive for speculators and to prevent an appreciation. In contrast, the European Central Bank (ECB), which is leading the way in Europe, has gradually eased its monetary policy through falling interest rates and a gigantic bond purchase program. The US Federal Reserve has recently cut its key interest rate again. This makes the franc attractive to investors compared to other currencies. «In 2019, the interest rate differential between Switzerland and other important currency areas has narrowed. This creates upward pressure, »says Credit Suisse analyst Botteron.
Switzerland under observation
Switzerland is now back on the US watch list for currency manipulators. Even if the possible consequences of this are unclear, this could have an impact on the SNB’s willingness to continue to weaken the franc with targeted market interventions. Investors took this as an opportunity to buy francs. “The expectation that the SNB will no longer be able to intervene in the foreign exchange market in the usual way has led to a small wave of speculation for the Swiss franc,” explained the St. Gallen Cantonal Bank. In recent years in particular, such interventions have been the SNB’s preferred means of resisting short-term appreciation.
—
