Currency of the Week: The Swiss Franc

It is considered one of the world’s strongest currencies given the stability of the Swiss government and its sound financial system. People have confidence in Switzerland’s central bank, and the country has always had a low rate of inflation. The Swiss Franc is the sixth most traded currency in the market, and is considered the classic “safe haven currency.” Dating back to the 1920s, there was a legal requirement that a minimum of 40% be backed by gold reserves. However, this link to gold was terminated on May 1, 2000.

Previously, we have discussed the amount of intervention conducted for specific currencies, by their respective central banks. The Swiss National Bank has a well-deserved reputation for actively controlling monetary policy for its currency.

Going back a few years, during the European debt crisis in 2011, as the Swiss Franc appreciated against the Euro, the Swiss National Bank actively provided support for the Euro, maintaining an exchange rate of about 1.20 Swiss Francs to the Euro. This was done in order to keep the Swiss Franc from appreciating and to help Switzerland be competitive in its export markets. The central bank printed Swiss Francs and used them to buy Euros.

However, on January 15th, 2015, the Swiss National Bank decided that it was no longer going to provide support for the Euro. Following the removal of their support, the Bank further took the cap off the Swiss Franc’s exchange rate against the Euro. Immediately after this surprise announcement, the Swiss Franc soared by around 30 percent in value against the Euro. It traded at 0.800 per Euro, before cutting those gains to trade 13 percent higher at 1.040. It initially gained 25 percent against the US dollar, before falling back to trade around 12 percent higher at 0.900 francs per dollar. The intervention stunned currency traders since the Franc had long been regarded as a safe haven, not a wild trading currency. The key Swiss interest rate was lowered from minus 0.25% to minus 0.75%, forcing investors to pay increased fees to keep their funds in Swiss accounts. As a further result of the devaluation of the Euro against the Franc, Switzerland’s export industry was negatively impacted. Worldwide, many brokerage houses and trading companies were hit with great losses; some even went bankrupt.

Of course the Swiss Franc has since calmed down, and recently the EURCHF rate has been fluctuating between 1.08 and 1.10, a further sign of Swiss stability.

On the macro-economic front, this past Wednesday, the Organisation for Economic Co-operation and Development (OECD) lowered its global economic growth forecast from 3.2% to 2.9% for this year.
Recently, the Swiss State Secretariat for Economic Affairs (SECO) released its quarterly report on Switzerland’s economic growth. Key details from the forecast show little change, another sign of Swiss stability:

2016 inflation forecast unchanged at -0.4%

2017 inflation forecast unchanged at +0.3%

2016 and 2017 unemployment rate lower at 3.3% vs 3.4% previous rate

GDP growth of 1.5% is now being forecasted for full-year 2016 (previous forecast: 1.4%)

2017 GDP forecast unchanged at +1.8%

In conclusion, the Swiss Franc is still one of the premier safe haven investments available. If you are looking for safety, it would have an appropriate place in your portfolio. Because of the country’s negative interest rates, and desire to control the value of the currency, it might not be the best vehicle for appreciation, unless January 15th, 2015 strikes again.