The franc has weakened steadily since it traded at 0.965 per euro in the aftermath of the SNB’s abrupt abolition of the currency cap, but its weakness this year has caught many investors off guard given the appreciation seen in other traditional safe havens amid the uncertainties of a potential US-China trade war and US-EU military action in Syria. Whereas the Japanese yen and gold have gained several percent in 2018, the franc has lost value – lost 2.5% to Friday’s close of 1.1979 – and has fallen to three-year lows in the process.
A heavy franc has been attributed by analysts to the perennial dovishness of the SNB and to sanctions imposed on Russian oligarchs by the US in April. The effected Russians, and their companies, held sizeable stakes in Switzerland’s top industrial firms and now, in need of liquidity, Russians have dumped their Swiss holdings, thereby dumping the franc and causing a slump in its value.
Of course, the SNB will be happy with developments in foreign exchange markets this year. The bank chose to cut loose the franc in 2015 after spending countless billions on buying euros, which was necessary to protect the franc’s 1.2 per euro level. Decision makers at the bank have made no secret of their desire for a weaker currency and have for several years implemented monetary policies that would discourage investors from holding francs. Further to a quantitative easing program, the bank has deployed negative interest rates since 2014. At minus 0.75%, benchmark interest rates in Switzerland are the lowest in the world.
Looking ahead, a further slide to 1.25 to the euro is most likely, thinks the team at UBS. The Financial Times reports that UBS is of the opinion that the franc will need to remain weak for a longer period of time in order to convince the SNB that threats to Switzerland’s financial stability are in the past.
As for Bank of America Merrill Lynch, it remains unsurprised by the franc’s current plight and sees “further losses ahead versus the euro and the yen.”
In other news…
Initially driven by Tuesday and Wednesday’s weaker-than-expected data for earnings growth and inflation, the pound’s four-day slump gathered pace on Thursday after Bank of England Governor Mark Carney hinted to the BBC that a May rate hike was not a given, citing “softer” economic data.
After Carney’s interview, derivatives markets shifted to indicate a near-40 percent probability of the BoE raising interest rates at next month’s meeting, down from levels above 70 percent at the start of the week.
The pound settled on Friday buying 1.4 US dollars; it had risen to fetch 1.44 dollars on Tuesday morning – a twenty-two month high.
The Hong Kong Monetary Authority continues to express confidence in the Hong Kong dollar-US dollar peg.
The Hong Kong dollar has lost value in all but two months since January 2017 due to a widening of the US-Hong Kong interest rate differential and the HKMA has been forced to buy more than HK$50 billion to keep the peg intact since the currency’s slide to 7.85 per US dollar on April 12th – this being the boundary of its allowed trading range.
“We see that the operation in the market has been smooth and orderly and the market’s confidence in the ability of the HKMA to maintain the stability of the Hong Kong dollar is very strong,” said HKMA Deputy Chief Executive Howard Lee on Thursday.
Equally unperturbed by currency weakness is the Budget Secretary of the Philippines, Benjamin Diokno.
Since 2013, the Philippine peso has been among the world’s worst performing currencies and a loss of 4.1 percent so far in 2018 makes the peso Asia’s worst performing currency of the year – an unfortunate title it also claimed for 2017. The peso settled on Friday at 52.13 per dollar, marginally stronger than March’s eleven-year low of 52.55.
“We are not worried about the weak currency,” Diokno told Bloomberg on Friday.