The price of Swiss security

The Swiss franc is very popular as a financial refuge. This is due to the turbulence surrounding the trade dispute between China and the United States and the rumor surrounding Brexit. However, this popularity comes with a price, which is mainly paid by the Swiss business community.

Last year, Switzerland impressed with its economic growth of 2,5%. This nice increase was mainly due to an increasing export of industrial goods. For now, however, the country can only dream of such a growth rate. For the current year, the growth forecast has been adjusted step-by-step from over 1,5% to less than 1%. Switzerland is suffering from the cooled economic growth in neighboring countries (such as in Germany). The sneaky advance of the Swiss Franc however, plays the main role in the slowdown in growth.

Slowly but certainly
The franc has slowly appreciated by 2018% against the euro since April 10. This revival is severely hampering the profitability of local businesses. Swiss companies, with costs in francs and revenues in euros, are faced with a choice to settle for a lower profit margin or increase prices and thus run the risk of pricing themselves out of the market. However, it remains to be seen whether the business community in Switzerland will get some air in the near future.  

An important reason for the rise of the Swiss franc is that this currency is a safe haven for the financial world. There is a stable political climate, the country has a highly developed banking sector and there is a central bank that is on a conservative course. These things make the country (and the franc) an attractive destination in times of heightened tension in financial markets. That is certainly the case in 2019, as a result of the trade war and the chaotic developments surrounding Brexit.

Race to the bottom
Other factors driving the franc upwards are very weak growth in the European Union and the slowing growth rate in the United States. Central banks in these areas are doing their best to fuel growth and inflation expectations. The Federal Reserve (FED) cut interest rates for the third time this year at the end of October. In addition, the European Central Bank (ECB) pushed interest rates further into the negative and announced a new buying program. The Swiss central bank has hardly any room for a counter-move in this area: since January 2015, the SNB has applied an interest rate of -0,75%.

However, the SNB is trying to slow down the advance of the franc in various other ways. In 2017, 'The Economist' named Switzerland the world's largest currency manipulator (before China and Russia). For the time being, the franc sales by the bank are of little consequence. The end of the advance will only be in sight when calm returns for some time to the financial markets and the European economy shows a sign of life. For now, however, local businesses continue to pay the price of Swiss security through a strong currency.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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