Although the road has been long and fraught with challenges, Swiss officials are starting to see their aggressive monetary activities bear fruits as the light at the end of the tunnel for policy emerges. With inflation on the mend and growth accelerating, the recent depreciation in the Franc has only helped the Central Bank reach its goals. Even amid a more precarious global financial market backdrop, the Swiss National Bank’s extreme accommodation has eliminated to a large degree problematic inflows. Helping further reduce the attractiveness of the Franc has been the relentless rally in the US dollar over the past three weeks, with the currency rising to an 8-month high against a basket of currencies. With rate hike expectations continuing to rise amid more hawkish comments from the Federal Reserve, the upside run in USD/CHF may still be in its early stages.
Franc Haven Appeal Deteriorating
When first announced, Switzerland’s negative rate regime brought a significant degree of scorn and criticism. Many analysts and economists were more concerned about the risks than the potential rewards of such a strategy. With much attention focused on the policy’s failing in other regions like Japan, Swiss rates need to be put in context that is more befitting the Alpine nation.For one, Switzerland has long been considered a political and economic safe haven. During times of turmoil, investors have a tendency to select assets that they believe will outperform or store value. Thanks to Switzerland’s haven status, the Franc has long been viewed within this frame of reference. However, as the data shows, despite looming global financial risks, investors are not fleeing to the Franc in droves.
In Switzerland’s case, negative rates have helped keep the Franc competitive in global financial markets, evidenced in large part by the latest trade figures.According to the Swiss Customs Administration, the September trade surplus printed at heights not seen in years, climbing to CHF 4.37 billion. Besides the biggest figure on record (record-keeping began in 1988), the surplus was driven by exports surging by 10.30% year over year while imports grew by 3.70% over the same period.Although inflation has not yet recovered to positive territory, the deflationary tide of the last 25-months appears to be ebbing, with the base effect of rising energy prices likely to provide a supportive backdrop for consumer prices.Further gains in the USD/CHF pair could also contribute to the upside in prices as a weaker Franc translate to more expensive imports.
