The unloved Swiss Franc

The unloved Swiss Franc

The Swiss franc lost just under 1% against virtually all currencies this morning. The euro is currently trading at 97.80 and the US dollar at 89.70 centimes. The reason: the Swiss National Bank unexpectedly lowered its key interest rate by 0.25 percentage points to 1.5%, making the Swiss franc less attractive.

Why the Franc is likely to stay weak for now:

• As higher interest rates can be earned in other currency areas, the Swiss franc is becoming (even) less attractive with today's interest rate cut by the SNB. In the US, the key interest rate is 5.5%, and in the eurozone it is 4.5%.
• In the short term, the Swiss franc is unlikely to appreciate in value. This is partly due to the unattractive interest rate differential and partly because the Swiss franc is a safe-haven currency, which is not in demand at all at the moment. The stock markets are breaking records. In this environment, no one needs a safe-haven currency.
• If the market euphoria comes to an end – which will happen sooner or later – the Swiss franc will appreciate again. This is especially true as the central banks in the US and the eurozone are also likely to reduce their key interest rates from the middle of the year onwards.
• According to our exchange rate models, the Swiss franc is only slightly undervalued against the euro but significantly undervalued against the US dollar. The fair exchange rate against the euro is around 95 centimes, and against the US dollar around 80 centimes.

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