Even though it hasn’t attracted many headlines, the Swiss franc has gone on a silent winning streak. It is virtually tied with the British pound as the top-performing currency of this year, while it has gained more than 3% against both the US dollar and the euro. Against the bruised Japanese yen, the franc has appreciated by around 15%, pushing the franc/yen cross to new record highs.
Several elements lie behind this impressive performance. First and foremost has been the Swiss National Bank’s exit from negative interest rates. With the central bank raising rates back into positive territory, global depositors are no longer penalized for parking their cash in Switzerland.
Direct FX interventions have also played a role. The SNB has been active in the currency market for a long time, but last year it flipped from a net-seller of francs to a net-buyer, in an attempt to strengthen the currency and exert downward pressure on imported inflation.
This can be seen through sight deposits at the SNB, which are considered a proxy for foreign currency purchases. Sight deposits have fallen sharply over the past year, revealing that the central bank has been actively selling foreign currencies and buying francs on the open market.
A quiet flight to safety likely helped the franc too. Because of Switzerland’s chronic current account surplus, the franc often acts like a safe haven instrument, especially when the Eurozone economy encounters trouble. With business surveys warning the Eurozone is headed for a mild recession, this dynamic probably came into play.
What’s next? All eyes on SNB
Looking ahead, there are both positives and negatives on the horizon. Arguing in favor of further franc gains is the worsening economic data pulse in Europe and China, which might continue to fuel safe-haven flows.
Any correction in high-flying US stock markets could have similar effects. That’s a real risk considering that equity valuations are stretched, earnings have been stagnant for three quarters now, and bond yields are trading near their highest levels of this cycle.
However, the Swiss economy has also started to lose steam, which in turn might give the SNB cold feet. In the second quarter, GDP growth was running at just 0.5% from a year ago, slowing down sharply as the stronger franc dampened demand for exports and capital investments stalled.