Franc's exchange rate goes down sharply (Daily analysis 25.02.2021)

The stabilization of the EUR/USD pair at 1.21 may delude one into thinking that volatility has completely faded in the currencies' world. However, the calm is only apparent! There is a dynamic reshuffling going on just behind the main currency pair.

Its key: the riskier a currency's profile, the stronger and more enduring its relationship is with global economic conditions, the better it performs. This is bad news for the yen and franc, currencies known as safe havens. The weakening of the Swiss franc comes into play here, as it lost about 2% against the euro and the dollar in February. The trend gained momentum this week.

In a year of recovery and the return of inflation

It was 2017 when the global economy most resembled a well-oiled machine or an ideally conducted orchestra. Global GDP grew by nearly 4%, and the weakest currencies at the time were the so-called safe havens, namely the dollar, the yen and the franc. Could the situation repeat itself this year, which is expected to be marked by a post-pandemic recovery and the return of inflation? A lot points to it.

So far, currencies whose economies have coped relatively well with the second wave of the pandemic, or whose economies are linked to commodity markets that are growing in price, or whose economies are supported by a smooth vaccination programme, have been performing well. These criteria are met by the Scandinavian currencies or the pound sterling, which has risen sharply in recent weeks. In the later part of the year, capital will be attracted to those currencies whose central banks are most likely (or will be forced by circumstances) to abandon their extraordinary course of action. In other words: those currencies will be weak whose interest rates will be raised last. Exactly what is happening in Japan and Switzerland.

When describing the recent turmoil in the franc market, it is difficult to find a piece of news, a single statement or a reading of data that could act as a trigger. The correction in the equity market is also not very conducive to such behaviour of the franc.

The franc's sell-off clearly accelerated after the EUR/CHF exchange rate surpassed last year's highs - a snowball-like effect was triggered. Given the progress of the vaccination program and the decline in the number of disease cases (especially in the US), this may have drawn attention back to the currency, whose exchange rate had previously been subject to limited volatility for many weeks.

We can say that the franc was aside for a long time, but now it is back to its place. Its valuation is catching up with the yen, which started declining earlier. Other currency pairs related to the global economic situation have already made strong jumps. The Swedish krona, for example, has strengthened significantly, while the pound sterling has rallied impressively.

Worst-case scenarios less and less likely

It also cannot be ruled out that some market participants assumed that the outbreak situation would not improve over the winter and that vaccines might prove ineffective against newly detected variants of the coronavirus. For those expecting a cooling of investment sentiment, the franc and yen were the currency market's first choices.

Simultaneously, in the world's largest economy, the pandemic appears to be under control, with one in five US citizens already vaccinated. Any moment now, another anti-covid specific (Johnson & Johnson's) will be approved that will not require two doses of vaccine. As a result, herd immunity in the United States could be achieved in a few months.

The quarter is slowly reaching its end, and there are no significant chances for gloomy scenarios to come true. The weakening of the franc may be evidence of the surrender of investors who preferred such market bets.