The franc should remain below parity with the euro in 2023
Like other financial markets, the currency market had a turbulent year. The franc is clearly strengthening against the euro.
At the beginning of July, the currency pair thus fell below the parity where it has remained since.
KEYSTONE/CHRISTIAN BEUTLER
Like the other financial markets, the currency market experienced a turbulent year in 2022, with the franc, the safe haven par excellence in times of crisis, strengthening significantly against the euro. The Swiss currency should maintain its advance against the single European currency in 2023.
Friday morning, the Swiss currency was trading at 0.9863 francs for one euro, up 5% since the start of the year. The war in Ukraine, as well as the energy crisis and the economic slowdown that followed, reinforced the attractiveness of the franc during the year. At the beginning of July, the currency pair thus fell below the parity where it has remained since.
The year 2022 had started with a relatively strong euro, however, with the currency pair still trading at the beginning of February at a high of 1.06 EUR/CHF. But faced with the Russian invasion of its Ukrainian neighbor and fears of energy shortages in Europe, investors favored safe stocks such as the franc. Faced with these pressures, the currency pair thus reached a historic low of 0.9409 EUR/CHF at the end of September.
The weakness of the euro, however, also played a role, due to the monetary policy practiced by the European Central Bank (ECB). According to the head of investments at the Cantonal Bank of St. Gallen, Caroline Hilb, the Frankfurt issuing institution “missed the mark in the fight against inflation”. This is why interest rate expectations are lower and inflation expectations are higher in the euro zone. The combination of monetary policy and inflationary pressure weighed on the euro, to which is added the problem of debt, she underlined.
The euro is also very cyclical, according to Caroline Hilb. The euro zone’s common currency is in demand when the economy is booming and stock markets are rising, but it comes under pressure when financial markets are down. These difficult times generally benefit the dollar and the franc, two sought-after safe haven currencies in times of uncertainty.
Pay attention to the rate difference
For Thomas Heller, head of investments at Belvédère Asset Management, the euro zone is also more strongly impacted by the war in Ukraine and the energy crisis, which weighs on the euro. While Europe risks plunging into recession, this scenario is not envisaged by Thomas Heller for the United States and Switzerland.
The European Central Bank should now raise its key rates more vigorously than the Swiss National Bank (SNB).
KEYSTONE/DPA/FRANK RUMPENHORST
However, the ECB has started to act against inflation, which should support the single currency. But the EUR/CHF currency pair should remain below parity in 2023. The European Central Bank should henceforth raise its key rates more vigorously than the Swiss National Bank (SNB), which will strengthen the interest rate differential between the two currencies and support the euro, according to Thomas Heller. The latter expects a lateral evolution in the coming months “with a potential rebound”.
Valiant Bank also takes the weather into consideration. In the event of the return of more intense cold in Europe and an energy shortage, the economic slowdown could be even more pronounced. This would lead the ECB to abruptly stop its monetary tightening, despite high inflation, and the EUR/CHF currency pair would then return to its lowest point. In such a scenario, Valiant does not exclude a passage under the current floor at 0.92 francs for one euro.
Valiant Bank also takes the weather into consideration.
KEYSTONE/PETER KLAUNZER
Credit Suisse notes for its part that the SNB closely monitors the evolution of the exchange rate. If the franc were, in its view, to lose value too quickly, the Swiss Central Bank would have to intervene with currency sales to support its currency. On a 12-month horizon, the bank with two veils sees the currency pair evolve around 0.97 EUR/CHF.
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