Is CHF Really Overvalued?

CHF as Safe-Haven Asset

                The Swiss Franc has been historically known as a safe-haven asset, which means in times of difficult situation on financial markets or in geopolitics, investors always decide to buy Swiss Franc. This results in appreciation of CHF versus other major currencies like Euro or US dollars. For the past 8 years USD exchange rate against CHF has been oscillating between 0.88 and 1.03 range, and trades at historically low level currently. Some experts predict it to trade in 0.89-0.96 range for next few months. Also, other safe-haven currency the Japanese yen has been appreciating constantly for the last two years.

Constantly on the Rise

                The Swiss Franc is on the rise versus USD and other major currencies – it is the most appreciating currency of 28 major ones. This year it is already up by 8.1% year to year. It was highly influenced by the global pandemic which made investors not keen to risk and eager to buy Swiss Francs or other safe-haven assets. Investment managers are attracted by macro stability and security of Switzerland – relatively better than in other countries.

Overvalued CHF

                Other currencies are either undervalued significantly or moderately against the US dollars. Only CHF is overvalued in a huge way – according to the OECD PPP valuation model the CHF is overvalued by 26%, which means there is not much room for depreciation in close or medium perspective. When it comes to EUR/CHF exchange rate, in 2015 the Swiss National Bank removed the cap at 1.20, but still remains sensitive to it getting too overvalued. And rightly so, as the Swiss Franc is still very strong versus the Euro. It has triggered lower Swiss CPI in past three decades, and thus nowadays the CHF cannot rise too much without resulting in aggressive reaction from the SNB.

SNB’s Mission

                The SNB’s mission is to keep Swiss Franc from getting too overvalued, as Swiss export is hurt and inflation struggles to remain positive. As data of the Swiss Federal Statistical Office shows producer and import prices went up by just 0.1% in September, whereas in August it dropped by 0.4%. Year to year it went down by 3.1%. Import prices meanwhile slumped by 5.6% yoy. The SNB in its latest statement stated that deflation is expected to stay till at least 2021 and directly claimed that the Swiss franc is still highly valued. Thus, the institution is committed to keep making interventions on the FX market, e.g. buy euros or other currencies, in order to keep CHF exchange rate at more stabilized level. Investors have no other choice as to agree with the SNB operations, that seems devoted to keeping CHF from getting more expensive, and have enough resources to continue buying foreign currencies and influencing the national currency’s exchange rate.