Trading interest around the Swiss Franc was brisk as European and U.S. stock markets continued their descent in the wake of major losses in Asia. The USD/CHF fell below 0.9900 and reached a new seven-week low of 0.9845. While the Swiss franc continued to make gains in the foreign exchange (FX) universe, the U.S. dollar reached new lows against the yen and even against the euro. This suggests that the Swiss franc is still a safe haven currency.
“More and more market participants are realizing that the franc is no longer a safe haven, and that it is overvalued and that you are paying to hold that currency… Over the long run, the franc is going to appreciate, but I don’t think that will be the case in the next six to 12 months,” said Peter Haim, investment manager at WMPartners in Zurich. (Source: “Analysis: Declining Swiss Franc Fuels Speculation of SNB Intervention,” Euro Insight, February 4, 2016.)
Yet, the growing volatility in the markets, fueled by low oil prices, has pushed the values of the Swiss franc against the dollar. The franc has even gained against the euro. The latter suffers from the European Central Bank’s (ECB) determination to sustain economic growth in the eurozone.
While, Fed chair Janet Yellen has not issued another interest rate hike, there is still speculation over whether this might come in March. The Swiss franc has strengthened against all currencies in recent days thanks to uncertainty in the markets. So, the franc has resumed its traditional role as a safe haven currency in turbulent times.
The European common currency fell below 1.10 franc on Tuesday afternoon. Last year, the Swiss National Bank (SNB) waived its minimum 1.20 francs-per-euro exchange peg. The SNB took the unexpected decision to let go of the euro peg after a difficult period for Swiss companies. Companies tied to international markets and exports suffered. Tourism businesses also saw reduced demand from the higher Swiss franc.
The de-pegging means that the SNB has to worry more about the risk of overvaluation. UBS analysts expect the SNB to intervene to avoid overvaluation in 2016; however, the Swiss bank may have to intervene sooner rather than later. Slower Swiss economic growth and the Franc’s rise against key currencies are. (Source: “Swiss Franc (CHF) Overvaluation Concerns to Provoke SNB Intervention? [UBS Forecast],” Exchange Rates, February 9, 2016.)
The fixed exchange rate had been set up in 2011. Its purpose was to counteract the negative effects of an overly strong currency that was hurting Swiss companies, especially those with links to foreign countries.
However, the economic crisis in the eurozone prompted a major increase in demand for the Swiss currency. This had the effect of fueling a kind of uphill battle. The SNB thought that by adopting a peg—a minimum threshold if you will—it would allow the CHF to contain the consequences of this imbalance.
Today, the USD/CHF exchange rate is 0.97. The turbulence in the equity markets has intensified the rush of investors to safe haven currencies such as the Swiss franc. The U.S. dollar, meanwhile, slipped to its lowest level since November 2014 against the Swiss franc.
The main risk to the Swiss franc for investors is that if it appreciates too quickly, Switzerland enters recession. The SNB wants to avoid that. If other major currencies continue to drop, despite the SNB’s intervention, the Swiss franc would keep its safe haven status.