Curse of Swiss Franc’s Rally Seen Extending Beyond Greek Endgame

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The gains are generally bad news for the economy, pushing Switzerland to the brink of its first recession in six years and causing the sharpest drop in consumer prices in the developed world.

The gains are generally bad news for the economy, pushing Switzerland to the brink of its first recession in six years and causing the sharpest drop in consumer prices in the developed world.

Photographer: Philipp Schmidli/Bloomberg

It’s going to take more than a resolution of the Greek crisis to free Switzerland from an overvalued currency that’s pushing it toward a recession, according to Europe’s biggest bank.

HSBC Holdings Plc says investors seeking a haven from the faltering global recovery will keep being attracted by the relative stability of the franc, even if Greece pulls back from the brink of default. The franc is the best performing major currency against the euro this year, and options prices suggest traders expect a repeat performance in the second half.

The gains are generally bad news for the economy, pushing Switzerland to the brink of its first recession in six years and causing the sharpest drop in consumer prices in the developed world. Its trade surplus encourages investment in the franc, which surged to a record in January when the central bank ditched a 1.2-per-euro cap on its value that was established in 2011.

“Euro-Swiss is going to parity and lower, regardless of Greece,” said David Bloom, head of global currency strategy at HSBC in London. “When you’ve got a current-account surplus,” a high-skills workforce and stable politics, “you have only one option and that’s for a stronger currency over time. That’s the curse of success in today’s world.”

Greek Talks

The franc, a popular destination for traders in times of market stress, has declined about 0.6 percent versus the euro this week as early optimism in the Greek rescue talks melted away. With days to go before the nation’s current bailout expires on June 30, attention is turning to a summit of euro-zone leaders in Brussels on Thursday.

HSBC sees Switzerland’s currency appreciating to 95 centimes per euro by year-end, compared with a record 85.17 centimes after the Swiss National Bank abandoned its exchange-rate cap on Jan. 15. The franc was at 1.0479 per euro as of 9:33 a.m. in London.

UBS Group AG, Switzerland’s biggest bank, agrees a Greek resolution won’t significantly weaken the franc, which is also being supported by domestic money managers who are reluctant to invest overseas. The Zurich-based lender predicts the currency will remain little changed at 1.05 per euro by the end of 2015.

Franc Bear

Morgan Stanley is bearish, forecasting declines of about 4 percent to 1.09 per euro and 13 percent to 1.06 to the dollar by the third quarter. A deal on Greece would probably end up weakening the franc, according to Hans Redeker, the bank’s global head of currency strategy.

“If you had the Greek headlines disappearing it would definitely be positive for the SNB -- the Swiss franc would weaken,” said London-based Redeker. “The problem is not the inflow into Switzerland, the problem is that there’s no outflow from Switzerland.”

SNB President Thomas Jordan has struggled to encourage these outflows, with the nation’s negative deposit rate barely denting the franc’s gains.

“The franc at present is significantly overvalued,” he said in Lausanne on Thursday. “Our current monetary policy is geared to this difficult situation. It is based on one hand on the willingness to be active in currency markets, and the other hand on negative interest rates. Both will help us mitigate the appreciation pressure on the franc.”

Options Prices

There’s little sign of that happening just yet. At 7 percent of gross domestic product, Switzerland’s current-account surplus last year was more than three times the euro-zone average. The resulting strong currency has seen consumer prices fall on annual basis every month since November.

The franc’s gains look set to continue, too. The premium on six-month options to buy versus the euro over those to sell was 3.5 percentage points on Thursday, the most among 25 peers.

“The franc’s still going to be relatively strong because, right now, the drivers of the franc are more to do with the current account not being recycled” into overseas investment “rather than Greece-related flows,” said Geoffrey Yu, senior foreign-exchange strategist at UBS in London.

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