The Great Decline of the Swiss Franc

The Tough Years

The consensus among financial analysts during last 6-7 years is that the Swiss currency has been significantly overvalued and still is. Historically, EUR100 could be converted into more than CHF120, but in spring 2015, there was a remarkable currency movement and the Franc raised to unprecedented levels. Much at the joy of Swiss consumers traveling and purchasing abroad, but at the same time causing even more serious problems for Swiss companies and institutions having to increase their prices with up to 20% for clients abroad.

At the time, the Swiss National Bank was very aware of the issues a strong Swiss Franc would cause to exporting business and visitors to Switzerland, and therefore for a long time tempted to keep the EUR-CHF exchange rate above 1.20 (EUR1 = CHF1.20). To achieve this goal the Swiss National Bank sold CHF against EUR and also lowered interest rates, making it less attractive to change your money into Francs and to invest money here. The pressure however was big and too many foreign companies and investors continued to purchase Swiss Francs. In spring 2015, in an abrupt move, the Swiss National Bank went away from the first part of their strategy and stopped selling Francs to defend a level of 1.20. The reaction in financial markets was immediate, and the Swiss Franc went straight up and stabilized at level of EUR1 = 1CHF, even though the short-term interest rates at the same time were dropped to -0.75% (you actually received money if you took a loan in CHF) as a last desperate measure to park money in the Swiss mountains. 2015 and 2016 were tough years for many exporting companies. When a currency jumps by 20% overnight this translates into 20% more expensive prices of your goods when sold abroad and 20% higher costs on all goods and services bought outside Switzerland. Sales went down, margins went down, salaries were cut. Misery in short.

The Swiss Franc Is Becoming Cheaper

Few things – other than diamonds – last forever. Slowly since 2015, negative interest rates have helped equilibrate the Franc back into a downward trend. As can be seen on the graph below, the Swiss Franc has gradually gone down since, and is now after four years of continuous weakening coming back down and through the important threshold of 1.20. Analysts at UBS predict that the trend is not over, but will continue and in the shorter term already reach a level of 1.25. A tendency the president of the Swiss National Bank, Thomas Jordan, welcomes. He sees no reason to discontinue the decline by adjusting monetary policy. This is good and a fine guarantee for a continued depreciation of the Franc.

The great decline of the Swiss Franc is good news for Swiss exporting companies and visitors coming to Switzerland. In line with a weaker CHF companies can raise their export prices. It is also great news for future and current students at BSL who, through the new currency reality, get a 20% (soon to be 25%) discount compared to spring 2015!

A consequence of the weakening Franc is that interest rates are increased into positive territory. The opinion of the international financial sector is still that the Swiss Franc even today still is too strong. This and the fact that near-term risk appetite for equity investments is high – as the world economies are growing at a satisfying pace – will keep the CHF low and push it even lower.  

I welcome the trend and we hope for all of us that the next level will be 1.30 (EUR1 = CHF1.30). Breaking that threshold would certainly be bad news for Swiss consumers, having to pay higher prices for imported goods. However, given the dependency of Switzerland on exports (pharmaceuticals, machinery, clocks and chemicals), the country currently is, in my opinion, better off with an even weaker currency.

 

Author:

Dr. Jan Erik Meidell, Professor