Despite billions spent by the Swiss National Bank to curb the franc’s advance, traders pushing the currency toward parity with the euro might have their way.
With the global economy in recession and the euro area risking a new debt crisis, the currency — a popular haven — has already risen more than 2% against the this year. Options data suggest the pair may soon be on equal footing for the first time since 2015.
“There’s only really one thing that will change that story around and that would be harmony in the euro zone,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London, referring to the franc’s advance. “And we’re far from having a harmonious situation.”
The central bank has struggled to tame the currency for years, with the institution injecting over 440 billion francs ($454 billion) into the foreign-exchange market since 2009. And yet the currency rose about 30% in a decade, fueled by recurring anxiety over global growth and a euro-area breakup.
Fears of how badly the coronavirus will hurt economies worldwide are just the latest in a long list of reasons why demand for the franc is high. The franc is a haven because neutral Switzerland, with its banks, rule of law and political stability, has for decades been considered the one of the safest places for the world’s rich to park their money.
It emerged from the global financial crisis much less bruised than many of its neighbors, with little government debt and low unemployment.
There’s been market speculation that officials have their eyes on a new exchange-rate target that they’ll defend to the hilt. Some investors are focused on 1.05 per euro, after previous thresholds such as 1.12 and 1.08 were taken out. Strategists warn these triggers are largely fictional, meaning the race toward parity could come faster than anticipated.
“Markets like nothing more than talking about round numbers, so much so that they can become self reinforcing,” said Jeremy Stretch, head of G-10 currency research at Canadian Imperial Bank of Commerce in London. “Does the SNB really care explicitly about the number? Probably not.”
If the franc breaks through 1.05 per euro, it could “easily” head toward 1.02 per euro, according to Stretch. So far this year the franc has outperformed all Group-of-10 peers against the dollar save the Japanese yen, a fellow haven.
What Does SNB Care About?
The SNB says it doesn’t target levels and instead takes the currency situation broadly into account.
Switzerland’s desire to control the franc stems from its small, export-reliant economy and its outsized financial center. The euro area is the biggest destination for Swiss exports, including parts for the German automobile sector.
Simply handing the franc over to the vicissitudes of the market would send it soaring, making Swiss goods abroad more expensive, and potentially causing manufacturers to lose orders and banks to see profitability evaporate.
Swatch Group (SIX:) AG Chief Executive Officer Nick Hayek has been one of the most prominent advocates of a weaker currency. So too have left-of-center politicians, who fear companies whose margins have dried up due to the rallying currency will fire staff to compensate.
Another consideration is what a stronger franc means for inflation. While cheaper imports are a boon for shoppers, they’re a headache for policy makers whose mandate is to keep the rate of inflation positive but under 2%. Consumer prices have dropped for the past three months on a year-on-year basis.
“As long as you don’t have a 5% or 10% move in the franc in a matter of weeks or months, a small 1% move here or there doesn’t impact inflation,” said Viraj Patel, a currency and macro strategist at Arkera Inc.
Rhetoric Has Changed
In a country whose financial sector prizes discretion, SNB President Thomas Jordan and his colleagues provide few details about what they’ve been up to in the foreign-exchange market. Weekly data hint at the scope of activity, but the only hard evidence is the annual report’s tally of money spent on interventions.
But rather than stem the advance in the franc altogether, it seems the SNB’s approach has shifted. While it used to say the currency would weaken over time, that turn of phrase was abandoned several years ago.
“Their modus operandi is now one of damage limitation — slowing the appreciation of the franc rather than putting a fork in the road,” said Kamal Sharma, director of G-10 foreign-exchange strategy at Bank of America (NYSE:).
That’s a comfort for investors who, in 2015, saw the franc jump to parity with the euro in a matter of minutes after the SNB scrapped its cap on the currency. Brokers as far away as New Zealand went out of business as their clients racked up hundreds of millions worth of losses.
Investors have been on high alert for another jolt ever since.
As the region grapples with the fallout from the pandemic, banks are assessing the triggers that could send the franc roaring against the common currency.
It could rally if the ECB’s quantitative-easing program looks in danger of being derailed because of a landmark German court ruling earlier this month that questioned its legality. If that comes to pass, strains on the finances of highly indebted nations such as Italy could worsen, and the euro’s decline may accelerate.
At the start of the year, investors were bearish about the euro’s prospects against the franc, but that’s accelerated significantly since the coronavirus spread across the globe. Demand, meanwhile, is growing for insurance against further swings in the franc against the dollar.
The isn’t much the SNB can do about the currency’s “direction until the ECB starts tightening and that is light years away,” said Kenneth Broux, a strategist at Societe Generale (OTC:) SA in London. “All it might take is a second wave of Covid-19 after the summer and we could be drifting closer to parity with the euro by year end.”
©2020 Bloomberg L.P.