Swiss Franc emerges as a safe-haven as global bonds sell off
- USD/CHF retreats to the mid-0.8200s after hitting 16-month highs at 0.8380 earlier this week.
- Switzerland's low government debt is supporting the CHF as concerns about budget deficits grow.
- Commerzbank analysts affirm that the Swiss Franc might have already reached a bottom.
The Swiss Franc (CHF) is emerging as a safe haven amid the global government bonds sell-off, showing a surprising comeback against an otherwise firm US Dollar (USD) this week, as Switzerland's sound fiscal position stands out with government debt escalating amid the world's leading economies. Against this backgdrop, the USD/CHF pair has dropped about 1.2% over the last two days, hitting daily lows at 0.8266 after hitting 16-month highs at 0.8382 earlier this week.
Risk aversion has prevailed this week, as global treasury yields escalate. Investors are demandinghigher returns to buy government bonds, as budget deficits increase and high energy prices force most of the major central banks to tighten their monetary policies.
Swiss Franc seen supported as deficit concerns come to the fore
In this context, Switzerland stands out with a total net debt of CHF 149 billion, which is about 15% of the country’s Gross Domestic Product (GDP). In contrast, France’s debt has reached 119% of GDP, raising concerns about a new credit crisis in the Eurozone. The US shows a 125% debt-to-GDP ratio, while Japanese debt is well above 200% of its Gross Domestic Product, just to give an idea.
The low debt has offset the unfavourable monetary policy divergence that has crushed the Swiss Franc during the last few months. Moderate Swiss Inflation and an uncertain economic outlook amid the trade rift with the US have forced the Swiss National Bank (SNB) to keep interest rates steady at 0%. With global central banks tightening their monetary policies, the comparatively low SNB rates have attracted the attention of carry traders and threatened to send the CHF into a tailspin.
Looking ahead, analysts at Commerzbank highlight that the Swiss Franc is set to benefit as fiscal worries are increasingly shaping FX dynamics into year-end. They warn that there might be moments of CHF weakness in periods of stabilisation, but they also affirm that "the Franc has probably reached its low point in recent weeks and will not depreciate further in the near future.”
Swiss Franc FAQs
The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.
The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.
The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.
Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.
As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.