Swiss franc cannot be destroyed for the time being

Swiss interest rates are much lower than those in Europe, while the banking sector looks a bit shakier than usual due to the forced takeover of Credit Suisse by UBS. Yet the franc has not yet lost its role as a safe haven.

The Swiss franc is one of the most traded currencies in the world after well-known currencies such as the dollar, euro, yen, pound and renminbi. That says much more about the role the currency plays than about the importance of the Swiss economy. With a GDP of approximately €800 billion, the country contributes less than 1% to the global economy. But when tension in the financial world increases, many parties find their way to the franc. The currency owes its role as a safe haven to the stability of the political climate, the maintained course of the central bank and the highly developed banking sector. However, the latter factor took a hit earlier this year.

Criticism of mega takeover
During the market turmoil following the sudden bankruptcy of Silicon Valley Bank in March, Credit Suisse ran into major problems. The combination of rapidly declining customer and investor confidence with drying up liquidity meant that a forced takeover by industry peer UBS was the only option to prevent the bank from imploding. Due to the problems in the normally stable Swiss banking sector, the franc unexpectedly came under pressure in the spring. Although the third quarter figures that UBS published last week indicate that the merger of both banks is going well, there is still some criticism of the mega takeover from financial quarters.

Ultimate safe haven
The total balance sheet value of the new combination is greater than the total Swiss GDP. That could make it difficult for financial authorities to rescue UBS if the bank gets into trouble at any point. However, in the autumn it became clear that currency traders can easily ignore this. In the weeks following the horrific Hamas attacks in Israel, the franc rebounded to its highest level in five years. That reaction was similar to the period after the Russian invasion of Ukraine. At the time, the franc rose by 5% against the euro within a few weeks. In both cases, the currency was significantly more popular than the Japanese yen, which is also traditionally seen as a safe currency haven.

Take care
The difference can largely be explained by interest rate developments. While the Japanese central bank has kept interest rates slightly below zero since 2016, Swiss interest rates have risen gradually from -2022% to 0,75% since the spring of 1,75. Economists even took into account a further increase to 2% in September, but for the time being the Swiss central bank is taking a pause. Inflation is already well under control and after a price increase of more than 5% between mid-January and mid-October, the bank is reluctant to further stoke the fire under the currency. Unless tensions flare up again in the financial world or hairline cracks appear in the megabank UBS, the franc will experience a more boring and predictable course of action. Typically Swiss!

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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