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Cash.ch: Mr. Gitzel, demand for safe investment havens due to conflicts in the Middle East has pushed the franc to a record level against the euro. Do you see any other reasons why the Swiss franc is strong right now?
Thomas Gitzel: Overall, the SNB’s foreign exchange reserves appear to have fallen by 300 billion francs in just over a year. Therefore, the SNB intervenes in the foreign exchange markets in favor of the franc. This is one of the reasons why the franc is so strong, but only one. Purchasing power parity changed in favor of the franc, as inflation rates in Switzerland increased much less than in the Eurozone and the USA. So market forces moved the federal currency in the right direction. Painful international conflicts now do the rest: Frank is in demand as a safe haven.
The Swiss National Bank has been using the strong franc as an inflation-fighting tool since last year. Isn’t less than 95 cents too much for SNB?
It may seem so at first glance. Considering inflation differentials with its most important trading partners, the franc is by no means expensive, even at levels below 95. We currently see that the fair value against the euro is around 90 cents, which does not mean that these levels will be seen on price charts tomorrow. On the contrary, it indicates that further valuation should be expected in the medium term.
Do you think the SNB is now slowly buying up foreign currencies to prevent the franc from gaining further value?
The SNB is currently decreasing its foreign exchange reserves, not increasing them. Therefore, it cannot be assumed that the pendulum will suddenly swing the other way again. There is no point in weakening the franc by buying foreign currency. The current situation is quite favorable for the federal monetary authorities.
From where?
Thanks to the strong Frank, Swiss industry is able to buy goods cheaply from abroad and thus maintain its competitiveness. Since inflation pressure in Switzerland will increase again in the coming months due to high rents and high electricity bills, companies will definitely want to compensate for this with cheap foreign purchases. A strong franc does not mean that inflation rates are in danger of becoming too low. For now, a strong federal currency remains fully in the spirit of the SNB.
The safe-haven currency, the dollar, is also losing value against the franc, temporarily falling below 89 cents. At the beginning of the month this figure was still 92 centimeters. Shouldn’t this worry the SNB?
NO. The same goes for the euro. A strong franc is currently in the SNB’s interest.
Let’s assume there is a real escalation in the Middle East. To what level can the franc appreciate against the euro?
To answer this question, we first need to define what climbing means.
Please.
If this turns out to be a conflagration that will result in a proxy war between “East” and “West,” risk aversion could increase significantly. This would also have consequences for the Ukrainian war, as both the United States and Europe would face two wars. In such a situation, it is difficult to answer how much value the franc will gain as a “safe haven”. But levels below 0.90 wouldn’t surprise me.
How would the SNB react in such a scenario?
In this case, the SNB will refrain from further reducing its foreign exchange reserves as a first step and will then decide whether to buy foreign currency again.
Will the strength of the franc affect the SNB’s December interest rate decision?
The SNB’s September meeting showed that the desire to raise interest rates further was not very strong anyway. After all, a strong franc would only be a confirmation of avoiding further tightening of monetary policy.
What do you expect the October inflation figures to be for Switzerland?
The moderate rise in inflation will continue in October. We’ll probably be just under the 2 percent mark.
Things are heating up again in the euro zone due to rising yields on Italy’s government bonds. It looks like the ECB has recently increased its purchases of Italian bonds. How do you evaluate the situation?
The yield level has generally shifted upwards again recently. But it is also true that the movement in Italy is stronger than, for example, the German federal government. Therefore, the risk premiums of Italian government bonds increased. However, this is not a cause for concern so far.
For what reason?
Spreads are still low compared to history, and Italy has opted for longer-term debt in recent years, so the average interest rates paid by the Italian state will only increase slowly. In such an environment, it is understandable that the ECB would prefer to purchase Italian government bonds while reinvesting its bond assets. This is the “first line of defense” so to speak, or rather the most obvious precautionary measure. I see the situation quite comfortably right now.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
