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Swiss Franc Strength Threatens Switzerland's Economy, Making Heavier Intervention More Likely

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  • The Swiss franc has continued to strengthen in 2020, with both GBP/CHF and EUR/CHF weaker as compared to the year's opening prices.
  • The strength of the Swiss franc is a threat to the Swiss economy, as it makes Swiss exports less competitive.
  • Lowering the SNB's short-term interest rate further could be destabilizing. The only real alternative appears to involve heavier intervention.
  • One solution could involve the SNB expanding its acquisitions of listed international assets. Reducing the level of intervention on the other hand (i.e., conceding to the U.S. Treasury) would be very risky.
  • Therefore, while the outlook for CHF is mixed, the probability is building for further and aggressive intervention measures, and therefore, the possibility of an ultimate reversal to long-term CHF downside.

The GBP/CHF currency pair, which expresses the value of the British pound sterling in terms of the Swiss franc, continues to trade at prices that are close to all-time historical lows. Indeed, GBP/CHF set an all-time low in 2020 at the 1.11 handle. The monthly candlestick chart below illustrates this.

GBP/CHF Price Action in 2020

(Source: Barchart.com)

With no robust level of support, one might suspect further downside. Expecting long-term upside at this juncture would certainly be a contrarian viewpoint to take, as evidenced by price action which has been decidedly negative for many years. EUR/CHF is at a similar juncture, as shown in the chart below on the same time horizon.

EUR/CHF Price Action in 2020

(Source: Barchart.com)

One of the most significant points in history for the Swiss franc was January 2015, the month in which the Swiss National Bank (Switzerland's central bank) abandoned the EUR/CHF peg which had historically limited CHF strength. The immediate move was significant (as shown in the charts above, in January 2015, GBP/CHF, for example, dropped from about 1.55 down to as low as 1.26, before closing at 1.38 at the end of the month). Yet, in the grand scheme of things, for GBP/CHF the move would seem like a mere blip. Several new all-time lows have been registered since January 2015. The move was more significant for the euro, and the subsequent euro weakness has ushered in persistent SNB intervention (which has demonstrated limited success).

The EUR/CHF and GBP/CHF positive correlation remains though, even if their movements in relation to CHF are mixed. EUR and GBP are both considered riskier European currencies, while CHF serves as a kind of European safe haven. The euro and British pound sterling are also considered riskier owing to the Brexit threat which still remains. The deadline for a formal U.K.-EU trade deal is 2020 year-end, while risks remain beyond 2020 (especially for the

This article was written by

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Providing commentary and analysis, principally focused on global macro, foreign exchange, and equities as an asset class. Primary interests include equity investing from an international perspective, and FX fair values.

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