Super strong but…: Swiss franc loses against these three currencies this year

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Looking at the exchange rate, the Swiss franc has stood up against the vast majority of currencies in the world this year: over 3 percent against the euro and the US dollar, around 10 percent against the Swedish krona, 14 percent against the Japanese yen and even 33 percent against the Turkish lira.

The main reason why the franc is particularly strong this year is that inflation is low compared to abroad. Inflation in Switzerland peaked at 3.3 percent at the beginning of 2023. Inflation exceeded 9 percent in the USA and 10 percent in the Eurozone. Clearly clear comments from the Swiss National Bank that it wants a strong franc to prevent imported inflation are providing support for the Swiss currency in foreign exchange markets.

In addition, there are clear signs of an economic slowdown in Europe, causing the franc to rise. The franc is always in demand as a safe haven currency or “safe haven”.

Does not apply to all currencies

However, in 2003, the franc could not prevail against all currencies in the world. Cash.ch analyzed a currency basket of 32 of the world’s largest and most traded currencies. The result: Since the beginning of the year, three currencies have been “stronger” than the franc on an exchange rate basis: the Colombian peso (plus 17 percent against the franc), the Mexican peso (plus 9 percent) and the Brazilian real (plus 9 percent) plus three percent ). As the table below shows, the Hungarian forint is almost unchanged compared to the Swiss currency:

The fact that all three currencies come from Latin America also explains the price increases. Yield-hungry investors with plenty of cash on hand have set their sights on high interest rates in recent months. Reference interest rates in Latin America are much higher than in other major economies.

The difference between currencies is clearly visible when looking at the yield on ten-year government bonds: in Colombia, local “long-term bonds” are trading at almost 11 percent, while in Switzerland they are below 1 percent.

According to Bloomberg, governments and companies in the Latin American region in particular have issued $8.5 billion worth of local currency bonds to global markets this year; This is the highest figure since 2019. Last year the amount was a modest $1 billion.

Fluctuations in exchange rates in emerging markets are often unsustainable

As a result, Brazilian, Colombian and similar local currency bonds rose more than 20 percent in the first half of the year, achieving the best annual performance since 2009. Bonds from Latin American countries have also become attractive because they are oriented towards green and social projects, as in the case of Peru, and therefore comply with ESG guidelines for investors in mature economies.

So it’s no surprise that other smaller currencies in the Latin American region have also appreciated against the franc this year: Costa Rica’s colon gained 7 percent and Uruguay’s peso gained 1 percent. The left from Peru is at least unchanged against the Swiss currency this year.

However, history shows that such rises in exchange rates in emerging markets are often not sustainable. If the international interest rate structure begins to break down and investors’ risk aversion increases again, the picture for currencies could quickly look different.

Traveling to Latin American countries is therefore slightly more expensive for Swiss people in the short term. However, in the long term, you need to follow the long-term development of the exchange rate. In the last 20 years, the franc has gained more than 50 percent in value against the Brazilian real and Mexican peso. The franc gained 98 percent of its value against the Argentine currency during the same period.

Source :Blick