Swiss franc to weaken, maintains Societe General analyst Alvin Tan

Alvin Tan, FX analyst at Societe General Cross Asset Research, has reaffirmed a view put forward in early July that the Swiss franc is positioned for weakness going forward.

Tan and colleague Oliver Korber said then that Switzerland had become “an unwitting haven” for capital flight out of the eurozone as the region’s sovereign debt crisis worsened, which ultimately led to the Swiss National Bank (SNB) having to limit the currency appreciation to a €/CHF 1.20 rate.

The pair said their analysis pointed to a rate of 1.35 by mid-2014 as the eurozone area stabilised and returned to positive growth, aided by growth in the US. The latter would also contribute to capital flows out of rather than into safehavens such as the Swiss franc.

“Just as the franc was driven higher by rising risk premia, so it will come down as those premia deflate,” they wrote.

Technically, there are other factors at play. The defence against currency appreciation means that the country’s central bank has built up large foreign currency reserves – as it has sold CHF against other currencies. But these reserves pose a threat because they have been linked to monetary stimulus through the growth of the SNB’s balance sheet. Swiss demand is high, pushing up property prices to “worrisome levels”. Amid this high demand, there is imported deflation.

Thus, the scope for rapid changes in exchange rates is limited by linked effects in domestic consumption and inflation rates. Beyond 2014, the analysis suggests that a rate of 1.43 could be reached. It is unlikely before then because the European Central Bank is unlikely to start raising its interest rates before then – which would be needed to increase the difference in value between the currencies.


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