Swiss franc rally supercharged by search for safe havens

The Swiss franc: too strong for its own good? Keystone / Georgios Kefalas

The wave of risk aversion that ripped through markets at the start of the week has supercharged the Swiss franc’s rally, offsetting the prospect of further rate cuts and spurring calls for the central bank to take more action to cool its gains. 

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The franc jumped to its highest level in nearly a decade against the euro on Monday after its strongest week since Russia invaded Ukraine in early 2022. On Wednesday, the country’s biggest lobby group for manufacturers appealed to the Swiss National Bank (SNB) to do something fast to stop franc strength from hurting exporters and endangering the economic recovery.

Concern about a possible US recession, tense geopolitics, and a violent recalibration in Japanese markets have revived the franc’s traditional allure as a place for investors to park cash in times of turbulence. 

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Though a third straight rate cut from the SNB looks like a done deal in September, that hasn’t dented appetite from long-term investors and speculative funds. After borrowing the franc and selling it to buy higher-yielding currencies, those bets are being unwound as the attraction of the franc as a haven increases. 

At the same time, it’s not clear that the SNB needs to take more aggressive steps to curb the gains. So far, data suggest the strong franc isn’t contributing to the kind of inflation slowdown that could harm the economy and Geoff Yu, senior strategist at Bank of New York Mellon, says significant currency intervention is unlikely.

“I don’t see any clear sign that the franc’s gains are done yet,” he said. 

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Even after the franc gained about 5% since May, clients at BNY, the world’s biggest custodial bank, still have underweight positions in the currency. “The path of least resistance” points toward further gains, he said.  

The currency traded around CHF0.9370 against the euro in the European session on Thursday, trimming gains as the market ructions from earlier in the week abated and some haven flows were reversed. 

Investors have been slashing their bets for the franc to weaken for the second straight week, CFTC data show. The positions are still near their highest since 2007, suggesting the unwind has much more room to run. 

Markets are fully pricing a 25 basis point cut from the SNB on September 26, with odds of about 60% on a follow-up reduction in December, swaps show. That would leave the official rate at 0.75%, making Switzerland the most aggressive rate cutter among developed central banks.

Policy easing is normally negative for a currency because it reduces the yield investors receive on fixed-income assets priced in it. Political uncertainty from the Middle East to Washington have helped break that relationship and again put a focus on the franc as a safety bet. 

“I wouldn’t say that the franc is overvalued yet,” said Adriel Jost, fellow at the Institute of Swiss Economic Policy in Lucerne. The latest jump was “more of a normalisation,” with ample room for the franc to keep rising, given persistently higher inflation in the euro area than Switzerland, he said. 

Swiss inflation held at 1.3% in July from a year earlier, compared with a jump to 2.6% in the common currency zone. Jost said he sees a range of 0.95 and 0.90 as fair value for the euro-franc pair.