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Last year ended with a boom in foreign exchange markets. To the surprise of all market participants, the franc gained rapidly against the major currencies of the G10 countries, even though the Swiss National Bank signaled in mid-December that it would refrain from selling foreign currencies in the future.
The franc’s strength, which has continued more or less since then, is primarily due to external factors. On the one hand, the fact that geopolitical tensions do not decrease causes investors to flee to the franc. On the other hand, Raiffeisen economist Alexander Koch said in his statement to Cash.ch that aggressive interest rate cut expectations for the US Federal Reserve and the European Central Bank (ECB) may have weakened the dollar and euro.
Slight weight loss is expected
In the first days of the new year, all major currencies gained only minimal value against the Swiss franc. The Swiss currency is likely to continue to weaken slightly this year, according to economists and currency strategists. Bloomberg news agency’s consensus forecast predicts that the year-end exchange rate of the dollar against the franc will be 0.88 francs, while the year-end value of the euro/franc currency pair will be 0.99 francs.
According to the table below, foreign exchange experts participating in the Cash.ch survey are a little more cautious and see the dollar at 0.87 francs and the euro at 0.97 francs at the end of 2024.
Currency strategists argue that interest rate differentials currently favor the franc. This means that the interest income to be earned in Switzerland is lower than abroad. The higher this spread, the more attractive foreign currencies become. The second reason is that inflation is falling rapidly in the USA and the Eurozone, while inflation in Switzerland remains stable at just under two percent.
As a result, the gap between Swiss inflation and that of the United States or the Eurozone and most G10 countries has shrunk. Accordingly, as long as geopolitical turmoil does not continue, there is no need for foreign investors to overinvest in the local currency. It should also be taken into account that the Swiss Franc was considered overbought after its appreciation last year.
Difficult evaluation of the dollar exchange rate
Assessing the future development of the dollar-franc pair remains difficult, especially due to US interest rate expectations. While the US Federal Reserve generally expects three interest rate cuts of 0.25 percent each by the end of the year, yield estimates for long-term government bonds differ starkly, according to Thorsten Slok, chief economist at Apollo hedge fund.
This range ranges from less than 3 percent to more than 5 percent yield for 10-year U.S. Treasury bonds. This, combined with the US’s record $34 trillion debt, is a factor that could strongly move the franc’s exchange rate against the dollar this year.
Most foreign exchange experts are cautious about the dollar gaining value for two reasons. First of all, the strength of the Swiss Franc in recent years has been more pronounced than market participants expected. Secondly, all foreign exchange experts expect the franc to appreciate around one percent against the dollar in the long run, even if the exchange rate may fluctuate significantly around the average in the meantime.
Thomas Gitzel, chief economist at VP Bank, does not think the franc is expensive in terms of purchasing power parity. This applies to both dollars and euros.
“Although it is not our main scenario for 2024, an increase in the exchange rate against the euro to 0.90 in the short term should definitely be taken into consideration. “Unfortunately, the view on the Eurozone is not very enlightening at the moment,” says Gitzel. It expects a more stable euro in 2024 before moving towards 0.92 francs in 2025. The dollar is unlikely to rise significantly against the franc in 2024, but will trend significantly lower again in 2025.
Short-term euro recovery, long-term Swiss franc strength
Thomas Flury, head of foreign exchange strategy at UBS, and Kit Juckes, senior foreign exchange strategist at Société Générale in London, have a more positive view of the single currency. Both think the euro will appreciate against the franc in 2024. On the one hand, Flury attributes this to a technical countercorrection following the strong appreciation of the Swiss currency in recent months. He expects the ECB to take a hesitant approach to significant interest rate cuts that are already priced in.
UBS sees the European single currency in a relatively wide range of 0.94 to 1.00 francs against the franc, predicting a rate of 0.97 francs by the end of the year.
Juckes makes a similar claim, saying the euro will recover from extraordinarily low levels as the eurozone experiences a major trade shock due to the energy crisis. “This is unlikely to happen again, so we expect the euro to recover against both the franc and the dollar.” The London strategist has the highest forecast, with the euro against the franc at 1.04 francs.
Both Flury and Juckes emphasize that the franc could always be stronger this year. In the medium term, franc demand will remain stable over the next few years. Therefore, the franc will appreciate against the euro over the long term as part of an average appreciation of about one percent per year.
Pressure on Swiss companies’ profits continues unabated
Despite the slight consolidation of the franc against the dollar, euro and sterling, the major currencies, since the beginning of the year, nothing is clear for Swiss companies, a comment from Helvetic Bank said. While the Swiss company Tecan announced a sales warning due to negative exchange rate effects on Monday, Sika showed a negative exchange rate effect of 7.4 percent while presenting its 2023 sales figures on Wednesday.
Other companies are expected to make similar announcements in the coming weeks. However, similarly negative exchange rate effects should be expected again in 2024. Only from November to the end of December the euro (-3.14 percent) and the British pound (-2.86 percent) lost significant value against the franc. The Chinese renminbi is 4.75 percent lower and the dollar is down 7.56 percent. Even if current exchange rates remain stable for the rest of the year, this would already lead to significant negative exchange rate impacts of 4 to 5 percent for 2024.
But this doesn’t just have to be negative. Despite being the constant enemy of a strong franc, a strong local currency is the best fitness program for Swiss companies. It forces local companies to constantly optimize, become more efficient and keep their costs under control. This way, companies continue to innovate to justify higher prices to customers with better products. In the long run, these are the success factors that make Swiss companies successful internationally, Helvetische Bank writes.
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.
