The Swiss franc has historically had a special status as a safe haven currency. It appreciated strongly after the Lehman crisis in 2008 and throughout the Eurozone debt crisis. Its 'safe haven' status was only temporarily halted by a failed currency floor - introduced in 2011 and subsequently abandoned in 2015. The Swiss National Bank (SNB), facing deflationary pressures and arguably an overvalued currency, has tried to resist currency strength by intervening in currency markets and accumulating (predominantly) euro reserves on its balance sheet.
2017 was perceived as being full of political risk in Europe, with the Dutch and French elections potentially resulting in more populist and anti-EU governments. Since the third quarter of last year, the Swiss franc gained up to 2.5% against the euro just before the Dutch election, despite the SNB continuing to intervene to neutralise inflows and slowing down any further appreciation.
With short-term political risks in Europe fading, the Swiss franc reversed course and gave back all of its recent gains. Has the franc lost its appeal as a safe haven now Eurozone malaise has eased? We don't think so. Political risks remain as long as growth remains sluggish and uneven. The current cyclical upturn buys Europe some time, but without proper reform political risks could still be just around the corner. However, there are also other reasons to think the Swiss franc may continue to strengthen.
Switzerland is running a structural current account surplus, helped by a healthy and growing trade surplus. This in itself could put upward pressure on the currency. A large part of the SNB interventions was just about neutralising these inflows, but there is an unease with how quickly and how far the central bank's balance sheet can grow.
As an inflation targeter (i.e. CPI of less than 2% per year) the SNB has to balance deflation risk with the size of its balance sheet, which in turn drives the currency (assuming the SNB is hesitant in lowering the already negative interest rate on sight deposits any further). Inflation is not expected to reach their target anytime soon, but it has at least moved back into positive territory, while economic growth has never really been a concern. We believe this will make their tolerance for some further currency strength higher.
If you were contemplating going on holiday to Switzerland, therefore, now could be a good time, as we believe it's unlikely to become materially cheaper anytime soon.