On Monday morning, you only had to pay 94 Swiss franc cents for one euro: a new record. After years of seeking to devalue the franc, the Swiss National Bank has made a 180 degree turn in recent months. Faced with strong inflation, it now allows the national currency to appreciate.
Still growing at 1.03 francs to the euro at the beginning of the year, the Swiss currency accelerated on 16 June, after the first increase in the key rate of the Swiss issuing institution after years of stability. At the end of June, the currency pair fell below parity and on Monday morning it reached a new all-time low of 0.9409 francs/euro.
The chairman of the management of the SNB, Thomas Jordan, ignited the powder in mid-June by declaring that “if the franc weakens, we will consider, on the contrary, the sale of currencies” to maintain a frank strong . This message was repeated last Thursday, leaving the negative key rates raised by 0.75 percentage points to +0.50%.
“Before, the SNB intervened to reduce the upward pressure on the franc, now it can intervene to stabilize the appreciation of the franc and reduce inflationary pressures”, Nikolay Markov sums up. For the senior economist of Pictet Asset Management, “there is no longer any fear that the franc will appreciate. On the contrary, the appreciation of the franc is welcome because it makes it possible to limit the increase in the rate required by price stability”.
A role of shock absorber
Switzerland actually recorded a record inflation rate in August at 3.5%, more than the objective of price stability promoted by the SNB and which is between 0% and 2%. “If we remove regulated prices, inflation will reach 4.1%, i.e. a rate that is twice as high as the price stability objective of the SNB”, calculated by Alix Bhend-Lambin, economist financial strategist in BCV.
However, this is much lower than the 9.1% recorded in August in the euro zone and the 8.3% in the United States. The strength of the franc actually partially protects against excessive acceleration of prices thanks to the purchasing power that the Swiss currency provides for purchases abroad, especially for energy products. A 10% reduction in the euro-franc exchange rate thus reduces inflation in Switzerland by half a percentage point, according to Credit Suisse estimates.
“The franc played (…) its role as a shock absorber for import prices, but it did not prevent export prices (+ 1.3%) from rising. The Swiss currency helped to reduce at the expense of businesses,” said Alix Bhend-Lambin. For the latter, “the franc is not too overvalued: the parity against the euro is at 1.08 euro/franc”.
Faced with this development, how many floors 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”, warned Nikolay Markov. If the appreciation of the franc is too strong, the SNB may intervene to reduce the rate of appreciation of the Swiss currency, he believes.
A lot of uncertainty
“The very rapid appreciation will punish the price-competitiveness of exports, despite the high position in our industry”, maintains Arthur Jurus, senior strategist for Oddo-BHF Switzerland. According to the latter, the franc has structurally appreciated against the euro due to price differentials.
Faced with this situation, the specialist from the Banque cantonale vaudoise expects the euro-franc currency pair at 0.98 in six months, “in any case below parity”. “Some will depend a lot on the context, because there is a lot of uncertainty,” he warned.
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 expects 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 for five years to 0.85 euro/franc, reflecting the “macro-financial fundamentals observed today”.