Since the beginning of 2019, the Swiss franc is down against most currencies except the euro:
Since the surge in the franc against the euro since 2015, the general consensus has been that the Swiss franc remains overvalued against most currencies, and overall downside can be expected.
However, are we approaching a point where the Swiss franc may have approached oversold territory?
When examining the monthly chart for the CHF/EUR, we see that the currency hit a low of just below 0.84 – which marks the same level that the currency was trading at before the depegging of the franc against the euro.
Currently, the CHF/EUR is trading at 0.89, and might have further upside to 0.95 if one were to assume that the currency could reach this level again.
As regards the greenback, the CHF has steadily been trading near parity with this currency since 2015:
The Swiss National Bank has made it clear that no further rate hikes are expected for the next couple of years. Moreover, the central bank also has scope to reduce rates further.
That said, it is interesting that the franc has been rising against the euro in spite of negative interest rates. Due to the Swiss Franc’s status as a safe haven currency, the SNB has somewhat more leeway to keep interest rates low than other major central banks. In particular, given that the franc seems to be rising due to global economic concerns as well as those regarding Brexit, the last thing the SNB wants is to raise interest rates, and then see the franc rising further of its own accord due to “risk-off” sentiment creeping into the marketplace.
Notwithstanding the necessity of lower interest rates (and a weaker currency) to maintain a healthy Swiss export market, a side effect of negative rates has been a potential bubble brewing in Switzerland’s property market.
Mortgage lending across all categories of banks has increased considerably in the last decade:
At the moment, it does not appear that the condition of the real estate market is generating sufficient concern to warrant hikes in interest rates.
That said, with regulations being put in place such as the setting aside of over 4 billion francs by financial institutions to counteract the inherent risks, there is always the possibility that the market will increasingly expect further interest rate hikes in the future should the property market show further signs of overheating.
In this regard, while the Swiss National Bank may have no plans to raise rates at this point in time, an expectation of rate rises may be sufficient to induce further rises in the currency.
General Outlook and Conclusion
Over the longer-term, the franc has been trading virtually at parity with the greenback for the past four years. Moreover, the franc has shown strength against the euro this year in spite of persistently negative rates in Switzerland.
In this regard, it is my view that the franc has bottomed out against the euro after a period of sustained weakness, and further rises could be on the way. While a level of 0.95 against the euro by year-end is ambitious, I see a high probability that the CHF/EUR will end up trading above the 0.90 level. Moreover, with speculation that the U.S. Federal Reserve is increasingly running out of room to raise rates further owing to economic concerns, we could well see the franc start rising against the dollar as well.
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