The Swiss franc remains overvalued at the current rate of 1.16 francs per euro, said Swiss finance minister Ueli Maurer on Wednesday, but the currency is finally at levels that Switzerland “can live with.”
Long touted as being “highly valued” by the Swiss National Bank, the franc has depreciated by 14 percent against the euro since an explosion in both value and volatility after January 2015’s “francogeddon.”
Via negative interest rates, quantitative easing and market interventions, the SNB has for some years attempted to discourage investors from holding francs, which it is now achieving to some extent. Over a longer term, the franc remains, however, on a clear upward trajectory (a decade ago, the euro bought 1.64 francs).
Unsure whether the franc really is overvalued is Stefan Gerlach, chief economist at EFG Bank, who has this to say on the matter:
“The Swiss exchange rate appreciated strongly after the SNB abandoned the floor against the euro in early 2015 . . . [but] the Swiss franc has historically been appreciating.
“To determine if the Swiss franc is overvalued . . . the real exchange rate must be compared to its equilibrium level, which must be estimated. It appears from our model that in December 2017 the Swiss franc was a little overvalued, but not so much as to be outside the margin of error that is inherent in any FX estimation.”
Investors will of course care little for how economists, the government or central banks feel about the relative fairness of exchange rates; they care about the future, and where the franc will most likely be a month from now, six months from now, next year and beyond.
Offering forecasts over varying time horizons this week are researchers at Danske Bank.
In its latest market commentary, Danske’s research team, led by Christin Tuxen, says that the SNB “has clearly been challenged by the ECB’s hesitant stance [but] has cemented its eagerness to see the franc weaker before making a shift on monetary policy. With euro strength set to return eventually, this makes us comfortable about maintaining a case for franc depreciation in six to twelve months.
“We look for EUR/CHF at 1.16 in one month’s time, 1.16 in three months, 1.19 in six months and 1.22 in twelve months.”
On the hottest topic of the year, global trade, Danske adds that this represents a significant downside risk for the franc (upside for EUR/CHF), as it will be among the hardest hit of the G10 currencies from any trade-induced slowdown in global growth. Should a full-blown trade war materialize, investors should expect EUR/CHF rates to exceed the aforementioned forecasts.
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