© Esther Maria Reichelt
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I am not sure whether I would use the word "perilous", but I agree in a sense that the surprising growth of the Swiss economy in the second quarter does not necessarily indicate that Switzerland has barely been affected by the Franc shock following the SNB's decision to abandon the minimum exchange rate regime. Indeed, recent developments are promising. However we continue to hear about companies that plan to relocate their production side from Switzerland to Euro zone countries. In my opinion that is the big danger to the Swiss economy in the years to come. The full impact of the Franc shock on employment levels and hence demand will only appear in the long run.
The same is true for the impact on the tourism sector. In my opinion, the coming winter will show whether tourists, indeed, continue to come to Switzerland. So far this year the number of visitors seemed to have dropped only marginally. However this could be due to tourists booking in advance of the Franc shock and deciding to not cancel their vacation. Whether they continue to book their winter vacation in Switzerland is at least questionable, in particular for the important share of German tourists. In the second half of the year I expect the rather strong domestic demand to continue, but given higher uncertainties in the world economy and signs of no further pickup in economic sentiment in the Euro zone, the Swiss economy will expand only moderately.
The Swiss Franc now remains overvalued, since despite setting the lowest interest rates in the world, the SNB has failed to drive the currency significantly lower. In your opinion, what will be the general performance of the currency and what factors could determine the behavior of the Swissie till the end of 2015?
In recent weeks we have seen some pronounced CHF weakness. However, I do not see any reason why this should continue, in particular given the recent positive signs for the Swiss economy. Our general view remains that the Euro zone and Switzerland both are facing low inflation or even deflation. However, while the ECB will most likely react with further expansionary measures, the SNB does not has any of its regular options left. In our opinion, a further rate cut will only spur cash demand but will not be effective to ease monetary conditions further. QE does not seem to be an option given the rather small size of the Swiss bond market. Hence, the ECB monetary policy should continue to weigh on the Euro while the SNB does not have any instruments to offset this effect. In consequence, we expect to see lower levels in the EUR/CHF over the course of next year. Of course the SNB can intervene against the stronger Frank – and almost certainly will do so – but the bank indicated with its decision to abandon the minimum exchange rate that they are unwilling to intervene to a sizeable extent over a longer period. Thus, interventions should rather take the form of leaning-against-the-wind. Though, this only implies that a decline in the EUR/CHF will be slow.
On the positive side there are indications that safe haven flows will not put too much downward pressure on the EUR/CHF any longer, at least as long as safe haven flows are not triggered by the Euro zone developments. In our opinion, being a safe haven currency is a characteristic based on the long term rate outlook of a country. If rates will be low for a long time, the respective currency typically qualifies as a financing currency in times of higher risk appetite. These financing flows are reversed in times of higher uncertainty, which at least to some extent creates the characteristic risk-off pattern in currency markets. The experience with the uncertainty surrounding the situation in China indicates that the Euro seems to be an at least equally attractive safe haven as the Swiss Franc.
What are your forecasts for EUR/CHF and USD/CHF for the end of 2015?
We see the EUR/CHF currency pair to be around 1.07 in December 2015 and the USD/CHF we anticipate to be at 0.99 levels.