Swiss Franc as Safe Haven Currency

The Swiss Franc has always seen strong demand in times of elevated risk, be it market risk or geopolitical risk.And in the past it has probably been the number one “safe haven” currency, even ahead of the JPY and USD.

While JPY and USD in risky times usually experience an appreciation due to repatriation of investments (Japan with its huge accumulated savings and USD as the global reserve currency), CHF usually faces a strong upward pressure stemming from increased foreign demand which tends to overflood a limited market. This could last time be observed after the financial crisis, when the Swiss Franc outperformed EUR by roughly 50 percent in less than 4 years. Since the Swiss National Bank had installed the Euro-against-Swiss Franc floor of 1.20 in the second half of 2011 the upside pressure on the Franc could not become manifest in higher prices anymore but in a dramatic increase of the Swiss National Bank’s foreign currency reserves. In order to prevent the Euro of falling below the guaranteed floor, the SNB had to buy more than 200bln Euros in the first year of the floor alone. And even after having abandoned the floor and despite the prohibitively low cash rates of minus 75bp, the Swiss Central Bank continued to intervene in the foreign exchange market, as the Franc still got a lot of tailwind in a time of Brexit, Trump presidentship and Dutch elections. With 680 billion Francs the Swiss foreign currency reserves have reached almost 110% of GDP – a world record!

Although there is no theoretical limit to a Central Bank’s balance sheet and although inflation fears in Switzerland are muted or even inexistent, the SNB’s position is very uncomfortable. With no potent policy tool left, it has to wait for global and especially European risks to diminish. And whenever the upward pressure on the Swiss Franc increases too much, the SNB will have to intervene in the foreign exchange market.

We expect the risk to the Swiss Franc currently to be balanced with rather limited potential for bigger changes on either side of the current price. Although the Swiss National Bank seems to be willing to accept a small appreciation within time, a bigger strengthening will not be tolerated due to its negative effects on export industry and inflation. But also a substantial weakening of the Swiss Franc seems unlikely. As soon as the inflows from foreign investors will weaken, the SNB will with no doubt be happy to increase the distorted policy rate and reduce the flatulent foreign currency reserves.

In this context the Swiss Franc continues to be a safe currency with little price risk. But as a financial instrument to hedge against market risks, stemming for example from an undesirable outcome of the French presidential elections, the Swiss Franc seems rather inappropriate.

Joachim Corbach – GAM