Unusually, the Swiss currency has weakened against the euro and the dollar this year. Why this is, what it means for savers and what currency specialists are now expecting.
The reports of an Israeli attack on Iran are causing nervousness in the financial markets. Investors are worried about the spread of the conflict in the Middle East – this is weighing on the stock market and causing a flight to the “safe havens” of the capital market.
This traditionally also includes the franc. On Friday, the euro briefly fell below the 96 centime mark against the franc, but then rose again to above 97 centimes by the afternoon.
Since the start of the year, the Swiss currency has been weaker against the euro and dollar despite the ongoing geopolitical uncertainties. At the beginning of the year, less than 93 centimes were paid for one euro, but at the beginning of April it was up to 98.32 centimes – even parity came back within reach.
The franc has fallen even more against the dollar since the beginning of the year. On Friday afternoon, a dollar cost a little less than 91 centimes. At the beginning of this year it was only around 84 centimes.
Reasons for the weakening of the franc
The weakness of the Swiss franc this year is noticeable, especially since the currency has proven to be very strong in previous years. “The foreign exchange market is not a one-way street,” says Christian Apelt, currency strategist at the German bank Helaba. There are many reasons why the franc has weakened against the euro and the dollar this year.
Surprising key interest rate cut by the SNB: One of the main reasons for the slightly weaker franc is the surprise cut in key interest rates by the Swiss National Bank (SNB) in March. She unexpectedly lowered the interest rate by 0.25 percentage points to 1.5 percent. According to Claudio Wewel, foreign exchange specialist at Bank J. Safra Sarasin, the greater interest disadvantage of franc investments has been weighing on the Swiss currency since then.
The SNB’s key interest rate cut was made possible because inflation in Switzerland fell more than expected. In December last year, the National Bank was still expecting inflation of 1.9 percent in 2024, says Alim Remtulla, chief foreign exchange strategist at EFG Bank. In March it was assumed to be only 1.4 percent. Market observers are now expecting further interest rate cuts from the SNB.
The franc as a target for carry traders: The franc has recently become the preferred target of so-called carry traders, as the Bloomberg news agency reports. In such transactions, investors borrow in low-interest currencies and invest the money in currencies with higher interest rates. Traditionally, the Japanese yen has been traders’ favorite for this in recent years. In mid-March, the Japanese central bank raised key interest rates for the first time since 2007, from -0.1 percent to 0.0 to 0.1 percent. Now traders are apparently increasingly switching from the yen to the franc.
“Monetary policy divergence” and a stronger dollar: According to Aaron Hurd, managing director at State Street Global Advisors, the SNB’s rate cut in March and the European Central Bank’s (ECB) hints of a possible rate cut in June stand in stark contrast to market participants’ new expectations for U.S. monetary policy. The Federal Reserve (Fed) is concerned.
Investors now expect the Fed to cut interest rates less sharply this year. At the beginning of the year they had expected that the key interest rate in the USA would be reduced by 1.5 percentage points in 2024. Now it is only 0.5 percentage points. There is a “monetary policy divergence” and this has put a heavy burden on the euro and the franc compared to the dollar, says Hurd. The inflation figures in the USA have recently been slightly higher than expected, plus the continued robust economy in the USA, which is counteracting interest rate cuts.
Higher yields in the US: US Treasury bond yields have risen significantly this year due to changing expectations. According to Hurd, two-year U.S. Treasury securities are yielding 0.84 percentage points higher than at this year’s lows in January. On Friday, two-year American government bonds yielded 4.96 percent and ten-year bonds yielded 4.60 percent. Swiss government bonds, meanwhile, yielded 0.84 (two-year) and 0.67 percent (ten-year).
Strong stock markets: According to Apelt, the good development of the stock markets could also have weakened the franc this year. The risk-taking mood on the financial markets was “certainly not supportive” for the Swiss currency, which has traditionally played a role as a safe haven.
Will the franc continue to be used for carry trades?
Wewel does not expect the franc to recover significantly in the coming months. The weakness of the Swiss economy speaks for a further interest rate cut by the SNB in June. However, a series of ongoing geopolitical crises, in particular the Iran-Israel conflict, have the potential to help the franc – as a safe haven – gain some momentum again.
According to Remtulla, the trends of deglobalization and dedollarization have supported the franc in recent decades. If these trends continue, the Swiss currency is likely to remain a safe haven, according to the foreign exchange specialist. However, if the free movement of goods, services, capital and people is strengthened, it can be assumed that the franc will fall behind the currencies of more dynamic economies.
Opinions differ as to whether the franc will be used on a larger scale for carry trades. Hurd expects this. The franc has the second lowest returns among the ten most traded currencies. Calculations of the long-term fair value of currencies showed that it was overvalued by 13 percent against the dollar and by 20 percent against the euro. This speaks for it.
Wewel, however, does not believe that the franc will permanently replace the yen as the preferred currency for carry trades. At 1.5 percent, the SNB’s key interest rate is still well over one percentage point higher than that of the Bank of Japan, and the real interest rates on Swiss franc investments are once again significantly higher than those on Japanese investments. The high level of Japanese national debt will also severely restrict the Bank of Japan’s scope for further interest rate increases.
Franc appreciated against other currencies
What do the latest developments mean for savers and investors? Wewel advises Swiss investors to tend to have an overweight in Swiss franc investments (“home bias”). After all, the franc has continued to appreciate against other currencies in recent years. Hurd also believes that a certain “home bias” almost always makes sense in a reasonably well-run economy. After all, investors would have to service liabilities in the home currency.
When it comes to stocks and other risky investments, however, a “home bias” is less justified for Swiss investors. By investing abroad, Swiss investors can diversify their funds more broadly and invest in sectors that are less represented in Switzerland.
Especially when it comes to bond investments, it makes sense (but unfortunately often expensive) to hedge the currency risk. Otherwise there is a risk that the return will quickly be “eaten up” by currency fluctuations.