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Swiss Franc Resumes Advance as Economy Strengthens

Swiss 10 franc banknotes
Switzerland’s economy is picking up as government data on Aug. 6 showed unemployment slid to the lowest level in more than a year. Photographer: Christophe Bosset/Bloomberg

The Swiss franc’s best start to a year against the euro since the common currency’s debut is regaining momentum as the nation’s economy strengthens, just as budget cuts begin to throttle growth in the 16-nation region.

Demand for options granting the right to buy the franc against the euro versus those providing the right to sell is at its highest since June 29, two days before the Swiss currency strengthened to a record. The franc will appreciate 3.78 percent to 1.30 per euro in three-to-six months, said Manuel Oliveri, a strategist in Zurich at UBS AG, the nation’s biggest bank.

Switzerland’s economy is picking up as government data on Aug. 6 showed unemployment slid to the lowest level in more than a year last month and the central bank in June raised its 2010 growth forecast to about 2 percent, double what the European Central Bank predicts for its members. ECB President Jean-Claude Trichet said Aug. 5 the economy may weaken in the second half as austerity measures hobble nations such as Greece and Spain.

“Austerity measures will hamper growth in Europe, put pressure on the single currency and support the franc,” said Oliveri at UBS, the world’s second-largest currency trader. “Even if concerns have waned that the euro area may break up, growth expectations in Europe are subdued compared to Switzerland.”

SNB Before ECB

The franc will also get a lift as investors speculate that Swiss policy makers, led by Philipp Hildebrand, will increase borrowing costs before the ECB. The Swiss National Bank will raise its three-month Libor target rate to 0.5 percent in the first quarter, from 0.25 percent, the median forecast of 10 analysts surveyed by Bloomberg shows. The ECB won’t raise its main rate from 1 percent until the third quarter, another survey showed.

“The SNB will raise rates prior to the ECB,” said Marcus Hettinger, a strategist at Credit Suisse Group AG in Zurich. “That might give the franc more impetus.”

Hettinger said he expects the Swiss central bank to start increasing its benchmark interest rate in December, with its European counterpart staying on hold for at least one year.

The franc weakened today and was at 1.3499 per euro as of 4:09 p.m. local time in Zurich. It’s little changed against the euro this month, after depreciating to 1.3819 per euro on July 28 from a record 1.3074 at the beginning of the month. The Swiss currency slid 3 percent against the euro in July, its worst monthly performance since November 2008.

Risk Reversals

Demand for options granting investors the right to purchase the franc versus those giving the right to sell suggests the gains may persist. The franc’s three-month risk reversal rate was 1.90 percent yesterday. When positive the measure means demand for options giving the right to buy the currency is greater than demand for those that allow sales.

The Swiss currency jumped about 10 percent against the euro this year as investors bought it as a haven from the euro-region’s debt crisis. The SNB, which began selling francs in March 2009 to curb gains and ward off deflation, signaled last June that it would end the policy, saying risks of deflation, or a general drop in consumer prices, had “largely disappeared.”

The central bank’s euro holdings surged to 159.9 billion francs ($152 billion) in the second quarter from 80.6 billion francs in the previous three months, the SNB said on July 21. Dollar reserves were at 48.7 billion francs at the end of June.

“We’ve been able to avoid the deflationary risk that was weighing on the Swiss economy,” SNB Vice President Thomas Jordan told Swiss broadcaster SF in a clip posted today on its website. “Our policy has been successful.” The SNB would take “all measures if price stability was threatened,” he said when asked about its current stance on interventions.

Fair Value

Slowing Swiss growth and diminishing concern that the euro-area’s fiscal crisis will lead to defaults will keep the franc from appreciating, said Martin Gueth, an economist at Landesbank Baden-Wuerttemberg in Stuttgart, Germany.

“The Swiss franc has reached its fair value at the moment,” he said. “The franc will move sideways or even weaken slightly as next year’s economic growth will be slower than this year’s. Its massive appreciation in May and June was caused by concerns over European fiscal deficits and a breakup of the monetary union. The franc won’t appreciate more as these concerns will wane.”

A weaker franc also makes exports cheaper, with revenue earned abroad worth more when it’s brought home. The euro region is Switzerland’s largest trading partner, absorbing 60 percent of the Alpine nation’s exports.

Kuoni Reisen Holding AG Chief Executive Officer Peter Rothwell told Handelszeitung on July 14 that the Swiss travel company, the nation’s largest, was having a “much stronger” month after the first half was “more demanding” than the company expected.

Record Expansion

An index of leading Swiss indicators stayed at the highest in almost four years in July, a report from the KOF research institute in Zurich said on July 30. Manufacturing expanded at the fastest pace on record last month, according to the SVME purchasing managers’ index released by Credit Suisse on Aug. 2.

Euro-region industrial production dropped 0.1 percent from May, when it increased 1.1 percent, the European Union’s statistics office in Luxembourg said Aug. 12. Economists had projected a gain of 0.6 percent, the median of 32 forecasts in a Bloomberg survey showed. Greece’s economy shrank for a seventh quarter as austerity measures that aim to trim the EU’s second-biggest budget deficit deepened a recession, data from the Athens-based Hellenic Statistical Authority showed yesterday.

“The franc’s tendency to appreciate isn’t over yet,” said Ursina Kubli, a currency analyst at Bank Sarasin & Cie in Zurich, who predicts the franc will reach 1.30 per euro at year-end. “The franc is going to gain because of the risk of a double dip and because of its safe-haven qualities.”

Jordan said the central bank will take “any measure necessary” to defend the stability of Swiss prices.

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