Franc Devaluation: End of the "Safe Haven"?

Changes in sentiment on the global markets will continue to influence exchange rates in 2021. In particular, companies operating abroad should not disregard currency fluctuations, as costs will quickly skyrocket if they fail to hedge. The fintech company Ebury, based in Zurich, helps its customers to optimally hedge against currency losses and is once again ranked first among the best forecasters for the euro/US dollar exchange rate by Bloomberg due to its accurate exchange rate forecasts in the fourth quarter of 2020.

Swiss franc depreciation and further prospects

A depreciation of the Swiss franc has been observed for some time. This, after last year's state of emergency around COVID-19 saw the Swiss franc live up to its reputation as a "safe haven". Fabio Comminot, Head of Dealing at Ebury, reveals how the Swiss franc will fare this year and what stance the Swiss National Bank (SNB) will take.

Switzerland's economic and political stability makes the Swiss franc a sought-after investment internationally. Is this also reflected in the current uncertain situation due to the Corona pandemic?
Fabio Comminot: Currencies, which are considered safe havens in times of crisis, benefited most from the prevailing uncertainty following the outbreak of the corona virus in the first quarter of 2020. In particular, at the beginning of the crisis, the Swiss franc rose sharply and appreciated against the euro and the U.S. dollar. This was despite the Swiss National Bank (SNB) intervening heavily to curb the appreciation of the Swiss franc. As the political situation normalized somewhat after the first lockdown in March, the EUR/CHF currency pair was at its low point in May. This is because the lower the uncertainty, the less investors worldwide seek protection in the Swiss currency.

The downward movement of the Swiss franc accelerated further in November 2020 and this despite still high infection figures. Why did the ongoing uncertain economic situation not lead to an appreciation of the franc again here?
Fabio Comminot: Real economic conditions are always important for the development of exchange rates. However, it is not so much the actual state of an economy that is decisive, but the expectations of market participants. For example, following the outcome of the U.S. elections and news of progress in the development of several vaccines, the Swiss franc became visibly less attractive as many investors became cautiously optimistic and thus more willing to take risks.

Uncertainty and hope also characterized our start to 2021. What will happen to the Swiss franc this year?
Fabio Comminot: As the Swiss government has been rather lenient by international standards with regard to pandemic containment measures, we expect the Swiss economy to benefit less from the easing of the Corona measures in 2021 than other countries. The Swiss franc will therefore continue to depreciate gradually against the euro. The return to a more "normal" level of global economic activity is likely to further reduce the attractiveness of "safe assets".

As previously mentioned, the Swiss National Bank (SNB) intervened heavily in the earlier stages of the Corona crisis in an attempt to weaken the Swiss franc. What strategy will the SNB pursue in 2021?
Fabio Comminot: In the first half of last year alone, the SNB spent an estimated 90 billion francs to weaken the national currency. This is because Switzerland's heavy dependence on exports means that a strong currency is a problem for the SNB. Thus, preventing a strong appreciation of the franc remains the SNB's most important policy tool. We at Ebury therefore believe that the SNB will continue to intervene in the foreign exchange market and prevent a significant appreciation of the franc. The optimistic view on vaccinations and the global economy also ensures that intervention will become increasingly less necessary in our view, as investors will prefer risky currencies instead. We expect the Swiss franc to depreciate further against the euro by the end of 2021.

Support from experts

It can be difficult for Swiss companies to budget ahead for the coming year when exchange rates change between the time they invoice or receive an invoice and its due date. Risk solutions experts, such as those at Ebury, can help companies develop a plan to manage risk that is aligned with each client's business objectives so that future currency fluctuations won't hurt them. In general, however, the depreciation of the Swiss franc is helping the Swiss export industry.

More information: Ebury