Pandemic Shows That CHF Is Still Very Much a Safe-Haven Currency19 November 2020
The global coronavirus pandemic has proven that Swiss Franc is still very much a safe-haven currency, as it keeps on getting strong this year versus euro or – even more – versus US dollar. The SNB spent more on interventions than in past years.
Swiss Franc Getting Stronger
Since the outbreak of pandemic CHF exchange rate continues to strengthen. It could have been even more expensive if it weren’t for the Swiss National Bank’s interventions. Data shows that the SNB in the first half of 2020 spent as much as 97 billion dollars on transactions on foreign exchange rate market – more than in past years, triggering higher holdings of foreign currencies. To stop CHF from getting too strong, the SNB resolved to sell Swiss francs and but euros instead, which causes lower price of this first currency. For the SNB the acceptable level of exchange rate EUR/CHF would be 1.06 – one that would not harm Swiss industry and export. Current level around 1.08 exchange rate means CHF is a bit weaker versus the euro – perhaps to some extent a result of vast interventions of the SNB.
CHF Appreciation Not Good for Economy
So far, the pandemic has spare Swiss economy more than others, as it won’t post as big decline of GDP as European Union or USA. However, if the Swiss Franc exchange rate was higher versus euro or US dollars, the economy would have been hit much harder. This explains why the SNB is making such big interventions on FX market. As of August, its currency reserves were worth 850 billion francs, after they swelled significantly due to years of buying Swiss Francs by the SNB. The Swiss central bank monetary policy being a combination of interventions and record low interest rates, is here to stay, as CHF shows no signs of getting weaker on its own.
CHF Is Still Safe-Haven Asset
The pandemic has shown even more clear that Swiss currency, together with Japanese yen, is one of best safe-haven assets in the world. In times of troubles, investors decide to buy Swiss Franc to diversify their portfolios and minimize risks. Also, they tend to buy equities of Swiss companies or Swiss real estate. As the long-term perspective shows that CHF will grow in value, it makes sense to add to portfolio some assets denominated in CHF. As a result, other risky currencies get cheaper. The US dollar has weakened versus CHF and is currently trading below 92 cents, meanwhile just in November 2019 both currencies were almost at par. USD/CHF exchange rate is just small part of US dollar index component – 4% to be precise. The more significant is the relation with the euro. But the exchange rate EUR/CHF is quite important for both Switzerland and European countries, as most of Switzerland’s trade is with the EU, especially France, Germany, Italy.