Last week the Swiss franc rose to a record high of 1.28 to the euro. That marked a gain of over 15% since the beginning of the year against the single European currency. And its run is unlikely to be over yet. It’s a traditional safe haven during times of market turmoil. And with Europe’s debt problem far from resolved, jitters over the peripheral economies are set to return, as we pointed out last week.
The Swiss economy is in much better shape than the eurozone. Public debt is just 40% of GDP and growth is expected to reach more than 2% this year. Of Switzerland’s exports, 20% go to Germany, so it’s piggy-backed off the rebound in the eurozone’s strongest economy, says Mansoor Mohi-Uddin of UBS. With austerity packages set to temper growth in much of the eurozone, it’s a fairly safe bet that Switzerland will raise rates before the European Central Bank. That implies “more impetus” for the franc, adds Marcus Hettinger of Credit Suisse.
What’s more, the Swiss central bank is highly unlikely to intervene in the foreign-exchange market from now on to hold the franc down (as it did
late last year and early this year) to ward off deflation. It reckons that the danger of deflation has dissipated. It also lost $14.3bn francs trying to lower the value of the franc, says Peter Garnham in the FT. For now, at least, it seems “there is little to stop the Swiss franc from setting new records” against the euro.
Chris Turner of ING Financial Markets sees the franc heading to Sfr1.25. Indeed, given all the currency’s strong attributes, Mohi-Uddin thinks the franc is becoming “a proxy for the old deutschmark”.