Franc Only Haven Left Means Biggest Gains SNB Can’t Stop

The Swiss franc, the best- performing major currency the past year, has become the only haven in the foreign-exchange market as the Group of Seven weakens the yen and the Federal Reserve floods the U.S. financial system with dollars.

The franc has surged 7.8 percent in the past year, the most among the 10 most-widely traded currencies tracked by the Bloomberg Correlation-Weighted Indexes. Not even the cash spent by Switzerland’s central bank last year to curb the franc’s strength was enough to keep it from appreciating more than 18 percent against the euro.

Bets by futures traders on further gains against the dollar reached the highest level this month since 2004, even as Swiss National Bank President Philipp Hildebrand said its rise poses “considerable risks” to the economy. Swiss growth will likely lag behind Germany and the U.S. this year as exports from watchmaker Swatch Group AG (UHR) to technology company OC Oerlikon Corp. risk becoming less competitive.

“The franc has become the ultimate safe haven,” said Audrey Childe-Freeman, head of European currency strategy in London at the private-bank unit of JPMorgan Chase & Co., the second-biggest U.S. lender by assets. “In a world where there are question marks against both the dollar and the euro and an environment that will be choppy for the yen in the context of intervention, the franc seems to be the best bet.”

Currency Trading

Switzerland’s currency has benefited from the nation’s role as a stable, neutral financial center and as an exporter of precision products from watches to machine tools. Since 1975, only the yen has appreciated more than the franc among the 10 currencies tracked by the Bloomberg Correlation-Weighted Indexes.

Exports account for about 50 percent of Switzerland’s economy, compared with 39 percent for Germany. The Alpine nation’s current-account surplus -- the broadest measure of trade because it includes investment -- may shrink to 10.95 percent of the economy this year, from 15.33 percent in 2010, according to the median of 10 estimates in a Bloomberg survey. Germany’s surplus may expand to 5.3 percent this year from 5 percent, a separate survey shows.

While Switzerland’s $491 billion economy is the 19th biggest in the world, the country has the sixth-most actively traded currency, according to the Basel, Switzerland-based Bank for International Settlements. The bank’s data show it accounts for 6.4 percent of the $4 trillion average daily turnover in foreign-exchange markets during the three years ended 2010.

‘Victim of Success’

“We are a victim of our own success,” Rudolf Minsch, chief economist at Economiesuisse, the biggest Swiss industry group, representing 30,000 companies totaling 1.5 million employees, said in a phone interview from Zurich on March 23.

The franc fell 1.4 percent last week to 1.29593 per euro and was 2.1 percent weaker at 91.99 centimes per dollar, after climbing to a record 88.52 centimes on March 17. It traded at 1.24025 per euro on Dec. 30, the strongest level since the euro’s 1999 debut. The franc was at 1.29482 per euro and 91.88 centimes as of 1:05 p.m. in New York.

The currency is still over-valued by 39 percent against its U.S. counterpart and is 32 percent too expensive versus the euro, according to an index developed by the Paris-based Organization for Economic Cooperation and Development that uses relative costs of goods and services.

Hedge funds and other speculators held a net 27,640 contracts at the Chicago Mercantile Exchange as of March 15 betting on a gain in the franc versus the dollar, the most since December 2004, before slipping to 21,301 last week. Traders on average have held a net 10,029 contracts expecting declines over that period, according to the Washington-based Commodity Futures Trading Commission.

Abandoning Euros

“The currency we are longest in Europe is the Swiss franc,” John Taylor, chairman of New York-based FX Concepts LLC, the world’s largest foreign-exchange hedge fund. “I don’t see any chance that the flow of money into Switzerland will change. People just want to get the heck out of the euro.”

Taylor, whose firm’s global currency fund returned 12.53 percent last year, its best performance since before the global financial crisis, said the franc may appreciate to 1.10 per euro, or 17.7 percent, as investors seek refuge from Europe’s sovereign-debt crisis, which has forced Greece and Ireland to seek bailouts from the European Union and International Monetary Fund.

The franc may be vulnerable as EU leaders negotiate an aid mechanism for the region’s most-indebted nations and the European Central Bank raises interest rates faster than the SNB.

Optimism Tempered

“We continue to see the franc as a safe haven, but we have to recognize that a lot of that is priced into the currency,” said Axel Merk, president of Merk Investments LLC in Palo Alto, California. “Yes, we like the Swiss franc but I wouldn’t bet my house on it.”

The Merk Hard Currency Fund (MERKX) has gained 2.86 percent this year, beating 83 percent of its peers as measured by Bloomberg data.

The median of at least 30 analyst estimates in Bloomberg surveys is for the currency to weaken to 1.35 per euro by year- end, and to 97 centimes per dollar.

Switzerland’s benchmark rate will probably end the year 1 percentage point below that of the ECB, Bloomberg News surveys of economists show. The SNB’s main rate is 0.25 percent compared with the ECB’s 1 percent.

Yield Differences

The extra yield that investors get for holding German two- year notes instead of similar maturity Swiss securities has more than doubled since Dec. 31, reaching 114 basis points, or 1.14 percentage point, on March 21, the most since June 2009 and up from last year’s low of 17 basis points in June.

Investors have little concern that the SNB will seek to buy and sell currencies in an effort to weaken the franc after the central bank failed at such attempts from March 2009 to June 2010. The intervention contributed to a $21 billion loss for the SNB last year, according to the central bank.

While Oxford-educated Hildebrand, 47, who has been head of the central bank since January 2010, and the SNB tried to weaken the franc on their own, the G-7 jointly sold yen on March 18 as that currency’s strength threatened Japan’s recovery from the magnitude 9 earthquake. The yen has fallen 6.8 percent to 81.81 per dollar from the postwar high of 76.25 touched on March 17.

In the U.S., the Fed began buying $600 billion of Treasuries in November in a second round of its quantitative- easing policy that will run through June. The central bank held $2.61 trillion of assets as of last week, up from less than $1 trillion in 2008. The Fed has kept its target rate for overnight loans at a record low of zero to 0.25 percent since December 2008.

Relative Growth

The Swiss economy will expand 1.95 percent this year, lagging behind growth of 2.6 percent in Germany and 3.1 percent in the U.S., according to Bloomberg surveys of economists. While the SNB raised its growth forecast for this year on March 17 to about 2 percent from 1.5 percent, the economy is “still facing considerable risks,” Hildebrand said in Geneva on March 22.

Swiss stocks are trailing their counterparts in Western Europe. The benchmark Swiss Market Index has declined 1.1 percent this year, compared with a 0.2 percent gain in Germany’s DAX Index and a 4.3 percent increase by France’s CAC 40 Index.

Stephen Urquhart, president of Omega, Swatch’s largest watch brand, said Swiss companies cope with a strong currency by focusing on the perceived quality of their products.

‘We Are Swiss’

“Most people buy our product because we are Swiss, and I think we just have to face the pros and cons of being a Swiss company,” he said in an interview March 23. “There are probably more pros than cons by the way.”

Oerlikon said the franc will reduce its reported revenue by about 200 million francs ($218 million).

“It would certainly be easier with euros but you can’t change your reporting currency overnight,” Juerg Fedier, the company’s chief financial officer, said in an interview.

Swiss exports increased in February as growth in Germany and Asia fueled demand for watches and machinery parts. The country’s trade surplus widened to 2.49 billion Swiss francs from 2.04 billion francs the previous month, the Federal Customs Office in Bern reported on March 22.

“The franc is basically the only safe-haven currency left,” said Kasper Kirkegaard, a senior strategist at Danske Bank A/S in Copenhagen, who expects the currency to trade at about 90 centimes per dollar in six months “The fundaments are very strong. That speaks in favor of a strong currency.”

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Liz Capo McCormick in New York at Emccormick7@bloomberg.net

To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net

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