Last Friday, the euro surged to 1.1537 against the franc, the highest level since the latter’s appreciation shock on 15 January 2015, when the Swiss National Bank (SNB) let go of its currency floor of 1.20 against the euro. The euro is currently in a phase of overshoot, not just against the US dollar but obviously against the Swiss franc too. However, in the medium term we do not expect a continuation of this trend against the franc. Our three-month forecast for the franc against the euro is at 1.11 and we are sticking to our cautious outlook of 1.08 for 12 months.
After Friday’s strong US labour data, the euro retreated against the franc below the level of 1.15 again. Following the landslide victories of Macron in France, which contained the populists there, and with broadening disappointment about the Trump administration, the euro has actually surged against the Swiss franc on a wave of euphoria. Thus, the currently buoyant Swiss economy is receiving an additional tailwind from the euro’s surge. The relative strength of the euro to the Swiss currency, especially during the last two weeks, does not turn the franc into a weak currency, but reduces its latent overvaluation to the euro. Switzerland is a long-standing capital exporter, with current account surpluses to its gross domestic product lately even in double-digit percentage points. Political tensions in the years before the French elections had led to a considerable reduction in Swiss private capital exports to the eurozone, forcing the SNB to step in and take that role through its massive currency interventions in order to stabilise the franc’s surge to the euro. As a ‘safe haven’, the franc can rapidly resurge again as a hedge against European woes, e.g. should a cyclical drag from a surging euro materialise or worries about Italian politics pop up again. In addition, the trade to go long on the euro against the franc has become crowded and we therefore caution against complacency, as does the SNB.