"Since the beginning of the year, the Swiss currency has become more expensive by about 0.25-0.30 PLN. This is bad news for those who are repaying loans denominated in the franc. However, there is even worse news. The upward trend may continue. What are the reasons for the stronger franc and why are they materialising now?" writes Marcin Lipka, Conotoxia Senior Analyst.
A stronger franc (CHF) is usually the result of investors' fear that the world's economy is not doing well. Swiss capital invested outside the country begins to return to its homeland and thus the Helvetica currency gains in value. This time, however, it is not only the fear about the fate of the global economic situation that is pushing the CHF upwards.
Extraordinary economic situation
Since most of Switzerland's foreign trade is with the EU, the economic situation in the Union is crucial for the economic condition of the Alpine country. This is where the first surprise comes in. Although economic growth in the eurozone or in the EU has clearly slowed down since the beginning of the year, Switzerland is doing very well.
PMI for the industrial sector reached 64.8 points in August. These levels are close to the historical records (67.3 points) of the last two decades. The GDP reading for the second quarter of this year also surprised positively. 3.4% y/y growth was the best result in 8 years. At the same time, the data for the first quarter was clearly revised upwards (from 2.2% to 2.9% y/y).
According to the Federal Statistical Office (FSO), industrial processing had the biggest impact on GDP growth in the second quarter. It added as much as 1.5 percentage points. Moreover, according to data from the Swiss association of mechanical and electrical engineering industries (MEM industries), new orders in the first half of 2018 increased by 24% compared to the same period last year. In general, reports from the Swiss industry depict a positive performance and do not suggest either a global or local slowdown.
A strong economy means a growing chance that interest rates will be raised in Switzerland in 2019. This is a positive signal for the franc. The condition of this currency is also strongly influenced by Italy's problems or currencies of the developing countries. Some investors still see the CHF as a safe haven.
In addition, it should also be remembered that capital invested in Swiss funds may not be inclined to invest in recently unstable Latin America. Portfolio investments may also be more limited in the context of the risk of expansion in the trade war.
All these elements are therefore positive for the franc, although in the past they have rarely occurred together (the economic outlook of many countries is deteriorating and the economic situation in Switzerland is exceptionally strong).
Hope for Swiss franc loan payers
Hope for franc loan payers may be the intervention of SNB (Swiss National Bank) in order to weaken the currency. Recently, however, the value of foreign shares and bonds has not increased in the SNB portfolio. Perhaps the monetary authorities do not want to fight too hard against the positive trend of the franc and are waiting for a better moment to enter the market more decisively.
As a result, the best information for those paying their loans in Swiss franc would be an improvement in the situation regarding emerging markets, a reduction in trade tensions and stabilisation of the situation in Italy. Then one could count on a drop in the franc by at least a dozen or so pennies. On the other hand, in the event of the trade war between the U.S. and China, involving the majority of American imports from the Middle Kingdom, the franc will probably continue to increase, although the risk of crossing 4.00 PLN is rather limited at the moment.