On Monday morning, you only had to pay 94 Swiss franc cents for one euro: a new record. After years of seeking to depreciate the franc, the Swiss National Bank has made a 180 degree turn in recent months. Faced with galloping inflation, it now lets the national currency appreciate.
Still evolving at 1.03 francs to the euro at the start of the year, the Swiss currency accelerated on 16 June, after the first increase in the key rate by the Swiss issuing institution following years of stability. At the end of June, the currency pair fell below parity and on Monday morning it had reached a new all-time low at 0.9409 francs/euro.
The chairman of the management of the SNB, Thomas Jordan, had set fire to the powder in mid-June by declaring that “in the event that the franc weakens, we would consider, on the contrary, selling currencies” in order to maintain a frank strong. This message was repeated last Thursday, with the abandonment of negative key rates which were raised by 0.75 percentage point to +0.50%.
“Before, the SNB intervened to reduce 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 this fear that the franc will appreciate. On the contrary, the appreciation of the franc is welcome since it makes it possible to limit the rate increases necessary to price stability”.
A role of shock absorber
Switzerland indeed recorded a record inflation rate in August at 3.5%, well above the price stability objective advocated by the SNB and which is between 0% and 2%. “If we remove the regulated prices, inflation amounts to 4.1%, i.e. a rate twice higher than the price stability objective of the SNB”, calculates Alix Bhend-Lambin, economist financial strategist at BCV.
However, this is significantly less than the 9.1% recorded in August in the euro zone and the 8.3% in the United States. The strength of the franc indeed partially protects against an excessive acceleration of prices thanks to the purchasing power conferred by the Swiss currency for purchases abroad, in particular for energy products. A 10% decline in the euro-franc exchange rate thus reduces inflation in Switzerland by half a percentage point, according to Credit Suisse estimates.
“The franc plays (…) its role as a shock absorber for import prices, but it has not prevented export prices (+1.3%) from rising. The Swiss currency is helping to reduce costs for businesses,” says Alix Bhend-Lambin. For the latter, “the franc is not so overvalued: the fair value against the euro being at 1.08 euro/franc”.
Faced with this development, how much floor is the currency pair likely to sink? “In absolute terms, there is no limit to the appreciation of the franc. There is, however, a limit to the speed of this trend”, warns Nikolay Markov. If the appreciation of the franc is too rapid, the SNB could intervene to reduce the rate of appreciation of the Swiss currency, he believes.
“Too rapid an appreciation would penalize the price-competitiveness of exports, despite the high-end positioning of our industry”, maintains Arthur Jurus, senior strategist for Oddo-BHF Switzerland. According to the latter, the franc is structurally appreciating against the euro due to price rise differentials.
Faced with this situation, the specialist from 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 many uncertainties,” she warns.
As for Nikolay Markov, he expects the franc to depreciate next year against the euro, “because the market environment should relax”. By December 2023, he anticipates a level of 1.05 francs per euro before the franc strengthens again in 2024.
And for Arthur Jurus, the medium-term appreciation should continue and bring the currency pair within five years to 0.85 euro/franc, reflecting “the macro-financial fundamentals currently observed”.