A more stable political and economic situation in the euro zone pushed the Swiss franc rate to its lowest level in two years. Is it a real breakthrough, high odds for a permanently weaker Swiss currency and its valuation drop to 3.5 PLN? Marcin Lipka, senior analyst of Cinkciarz.pl.
Whenever markets are in turmoil investors pour to the safe haven franc (CHF). The Swiss currency significantly gained valued during the global financial crisis of 2008/2009 and in 2011, when the Eurozone was on the verge of collapse.
Another important moment for the franc was the Swiss National Bank (SNB) decision to unpeg the EUR/CHF pair in early 2015. Since then, the average CHF rate was close to the 4 PLN level. It is also worth noting that after each of the listed events, the franc corrected but did not return to previous levels. In anticipation of the better economic situation in the world and the stabilization of the euro area, can we finally expect the long-term depreciation of the Swiss currency?
It is significantly overvalued
Virtually during every official presentation, the SNB members emphasize that the Swiss currency is too strong. "Frank remains significantly overvalued," said Thomas Jordan, president of the SNB, on May 11th in Zurich. Also in late March Andrea Maechler, a member of the Board of Governors, gave similar comments.
In every statement after the monetary authorities meeting the SNG highlights issues of a significant overvaluation of the franc, the need to continue the policy of negative interest rates and market interventions aimed at counteracting the strengthening of the Swiss currency.
What is the scale of the franc overvaluation? According to a report on Switzerland published in December 2016 by the International Monetary Fund (IMF), the average exchange rate in 2015 was overvalued by 16-23 percent. (EBA REER model). Because today the franc is about 5% weaker in relation to the basket of currencies of the countries participating in trade with Switzerland, the current overvaluation can be estimated at about 15 percent.
More arguments for the weaker CHF
Information on overvalued franc does not necessarily mean that the value of the franc will quickly return to equilibrium. But there are more and more reasons for the Swiss currency to be pushed lower.
First and foremost, we are dealing with the stabilization of the political and economic situation in the euro area. Taking into account the outcome of the elections in France and the Netherlands, as well as polls in Germany, the risk of disintegration of the single currency area has decreased noticeably. Buying a franc to protect from the negative developments in Europe seems less and less justified.
It is also worth noting that retaining capital in secure Swiss assets can result in hefty losses if the franc does not appreciate. Interest rates are negative and bonds up to 10-year maturity have negative yields.
Probably the SNB will continue to proceed with extremely dovish monetary policy combined with foreign exchange interventions. It is very unlikely it withdraws from it in the coming years. This should be another argument to limit the flow of capital to Switzerland to strengthen the franc.
A perfect moment fro a breakthrough?
Reduced risks in the global economy and stabilizing trends in the euro zone, coupled with negative interest rates in Switzerland and the SNB interventions to weaken the francs, is an ideal scenario for the weaker franc.
In the coming months, if the situation does not worsen significantly in the euro area, we should observe a slow decline in the value of the Swiss currency. In a balanced scenario the CHF should be pushed down by another 5%. By the end of the year, it may be traded in the range of 3.65-3.70 PLN.
In a very optimistic situation the majority of the Swiss franc overvaluation may be reduced which should be translated to its depreciation below the PLN 3.5 level.. This scenario would, however, require at least several quarters of a stable global situation and practically total negation of the euro zone disintegration risks. So far it is too early to count on such a fundamental breakthrough.