Disastrous news for Swiss franc loan payers

May 23, 2018 10:41 AM|Marcin Lipka

"The Swiss currency already costs about 3.70 PLN, which is 0.20 PLN more than a month ago. Why has the franc gained so much value in relation to the zloty and why will it be difficult to break this negative trend?" writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

There is no good news for those repaying franc-denominated loans. The Swiss currency is currently at its highest level for seven months. In the second half of April, the CHF/PLN exchange rate fell below the level of 3.50. What happened over the last few weeks that has made one loan installment rise by almost 6%?

Weak zloty due to global factors

Investors have been worried about the condition of emerging markets for at least a month. There are at least two reasons for this. Firstly, the dollar has clearly been gaining in value. This is a result of growing expectations regarding future interest rates in the United States and the relatively better economic condition of the USA. In other countries, however, there is rather a downturn and relatively low interest rates. This results in a capital inflow into the dollar.

The second element that threatens the economies of Asia, Latin America and our part of Europe is the increasing price of oil. This, of course, applies to those countries that have to import it. In the summer, Poland may lose about 1.5-1.8 billion PLN a month, compared to the same period last year, due to the increase in the price of crude oil.

Apart from higher costs for enterprises and households, this creates the need to purchase more foreign currencies, which deepens the general trend in the currency market of capital outflows from emerging markets and also for the Polish zloty.

Fear for the eurozone

Expensive oil and high dollar prices are negative for the zloty. However, for the valuation of the Swiss currency to the PLN in the long run, another, more fundamental issue is more important - the general situation in the eurozone.

This relation is defined by the correlation between the euro and franc. By the end of the first half of May, the EUR/CHF pair was high, around 1.20. This meant a rather weak franc and a relatively strong euro. Unfortunately, for over a week now, the franc has been very clearly gaining in value to the euro. Why?

First of all, it is the result of the populist government formation in Italy. The introduction of the guaranteed income for citizens of 780 EUR per month, the drastic reduction in taxes and the pension reforms withdrawal are expected to cost the Italian economy around 100 billion EUR per year. If these changes are made, Italy's debt will shoot up and the country's rating could be lowered to junk status.

The new coalition returns from time to time to the issue of leaving the eurozone. If Brussels does not allow Rome to pursue an unconventional economic policy, the subject of leaving the EU will return. This element is now beginning to value the market by strengthening the franc in relation to the euro at the level of approx. 3% in the second half of May.

In the summer, the franc may cost 3.8-3.85 PLN

Fears for the condition of the eurozone, combined with the low valuation of emerging market currencies and high prices of energy resources, are a dangerous mix for those who repay loans denominated in the franc. At the moment, there is little chance that the situation will improve. We should rather expect further negative information from Italy, namely further strengthening of the franc to the euro. This may mean that during the summer holidays, the franc will cost as much as 3.80-3.85 PLN, if Rome decides to wage an open war against the fiscal rules of the European Union.

May 23, 2018 10:41 AM|Marcin Lipka

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