Strong franc hurts Swiss watchmakers

Major luxury brands are getting a big boost from a support package for the Chinese economy. However, a group of Swiss watchmakers are sounding the alarm. A very strong franc is making it increasingly difficult to compete with competitors from other countries.

It is not uncommon for a central bank to be called upon to lower its policy rate. Sometimes, the call comes from government leaders who could use the economic boost from a rate cut in the run-up to elections. It is said that in 1965, President Lyndon Johnson even angrily pushed then Fed Chairman Bill Martin against a wall after the latter had dared to raise the policy rate. However, it is usually economists who have a strong view on the course of central banks. But in mid-September, a striking call came from Swiss watchmakers to the Schweizerische Nationalbank (SNB) to please lower the interest rate.

This is how a Rolex becomes completely unaffordable
Behind the call are well-known brands such as Rolex and Patek Philippe, but also luxury conglomerates such as Swatch Group and Richemont. Sales of Swiss watches fell by 2024% in the first seven months of 2,4. According to the companies, this decline cannot be seen in isolation from the strength of the Swiss franc. In the past two years, the currency has risen by almost 20% against the dollar. Sales to China in particular – where the renminbi is fairly in line with the dollar – are under pressure, with exports down 6%. Some watchmakers have even temporarily put some of their staff on leave in an attempt to avoid layoffs.

SNB prevents record hunt
The challenges for luxury brands are not isolated. The export sector accounts for no less than 55% of the Swiss economy. The rise in the franc makes it very difficult for companies from the Alpine country to compete with competitors from countries with a relatively cheap currency. Admittedly, the SNB made an attempt last week to keep the currency pressure off the boiler. The central bank lowered the policy rate from 1,25% to 1%. In addition, the SNB prepared for another interest rate cut in December. The franc took a step back for a while, but quickly climbed back up. If the central bank had not intervened on the currency markets, the currency would undoubtedly have resumed its hunt for records.

Trick box opens
The SNB will probably have to use its bag of tricks in the coming months to keep the franc under control. The currency is popular as a safe haven in uncertain financial times. Moreover, the Federal Reserve and the European Central Bank are well on their way to reducing their policy rates faster than the SNB. These interest rate movements are also pushing the franc higher. Sports brand On proves that it is indeed possible for a Swiss company to defy the currency headwind and be successful on the world stage. Sales shot up by almost 30% in the second quarter. This is partly due to the involvement of (former) tennis phenomenon Roger Federer. Everything he touches turns to gold. It is to be hoped for the Swiss business community that he stays away from the franc.

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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