Swiss Franc: Currency Strength Likely To Prevail

Last month, the Swiss franc had been rising against the greenback as fears of a second wave of COVID-19 gripped the markets, and demand for safe haven assets grew.

Recent Performance

On the whole, the growth in the CHF/USD continued into July, and accelerated in the latter half of the month – rising up to 1.0955 at the time of writing.

Source: investing.com

Much of the reason for the earlier low that we had seen in the franc was related to anticipation that a COVID-19 vaccine would soon be available – which boosted risk appetite in the markets and led investors away from the CHF. Moreover, with European Union talks having finally resulted in an agreement on a recovery fund – this further contributed to a temporary boost in risk appetite. However, this was quickly reversed as the CHF rebounded sharply to 1.0654.

The reality is that the future trajectory of COVID-19 is largely unknown. It is anyone’s guess as to whether there will be a “second wave” of the virus this coming winter, and this plays a large role in determining the demand for safe haven currencies going forward, including the Swiss franc.

Moreover, the euro has been seeing strength in the currency markets due to the fact that COVID-19 cases have been spiking in the United States. The unexpected strength of the euro in this regard further dampens demand for the Swiss franc.

The euro rose against the franc from just under 1.05 in May to 1.0753 at the time of writing.

Source: investing.com

From a risk-reward standpoint, in the event that we do see a second wave of COVID-19 with significant economic ramifications, then the Swiss franc may see a stronger rebound against currencies such as the euro and U.S. dollar under this scenario.

As regards the Swiss economy itself, Switzerland continues to pursue a policy of negative rates, with the central bank maintaining a rate of -0.75% at present. Moreover, with Switzerland continuing to make large foreign exchange interventions to prevent the currency from rising too rapidly, there is a possibility that the United States may choose to pay more attention to Switzerland in determining whether the country meets the criteria for officially being labelled a “currency manipulator”.

When the United States added Switzerland to its watchlist in January, the value of the franc rose to its strongest level against the euro in almost three years.

Looking Forward

Should speculation mount that moving further to officially label the country as a manipulator will dissuade Switzerland from further attempts to weaken the currency, then we may well see further strengthening under this scenario.

As regards the Swiss economy specifically, it is noteworthy that Switzerland managed to maintain its AAA credit rating in spite of the coronavirus impact.

Moreover, Switzerland’s level of government debt to GDP remains significantly below that of the euro area:

Source: tradingeconomics.com

In this regard, I take the view that the Swiss franc is likely to continue to see significant demand going forward irrespective of broader risk appetite. While the counterargument remains that Switzerland’s policy of deleveraging is excessive and resulting in lower government revenues, we can see that retail sales for Switzerland rebounded into positive territory after April, while that for the broader euro area still remains negative:

Switzerland Retail Sales YoY

Source: tradingeconomics.com

Euro Area Retail Sales YoY

Source: tradingeconomics.com

In this regard, my expectation is that we will continue to see further strengthening in the Swiss franc due to rebounding consumer demand. While the Swiss National Bank is apprehensive of the franc becoming too strong and harming exports, strength in the currency also appears to have boosted consumer spending.

From that standpoint, signs of a stronger recovery in Switzerland relative to the broader euro area is likely to further strengthen the currency from here.

Conclusion

Taking these points into account, I take the view that the long-term trajectory for the Swiss franc remains to the upside, and central bank interventions to weaken the currency could become increasingly ineffective should an overall risk-off sentiment prevail in the markets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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