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Swiss Franc Forecasts Upgraded at Julius Baer, Cite Economic Resilience

- Swiss economy can tolerate stronger CHF
- Fears over Coronavirus underpin CHF
- SNB can tolerate levels between 1.05-1.10

CHF strength

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Swiss investment bank Julius Baer says they are upgrading their forecasts for the Swiss Franc, citing supportive economic fundamentals and a Swiss National Bank (SNB) that can afford to be more tolerant of the currencies relative strength.

The Swiss Franc is one of the standout performers in global FX in 2020; the currency is sparring with the British Pound for the accolade of the biggest gainer for the period covering the past month:

Julius Baer on the Franc

Driving the Franc's trend of appreciation is an apparent combination of desire for safe-haven assets by the market - particularly in the wake of the Coronavirus outbreak in China - and the recent announcement by Washington that it'll be watching Switzerland closely for signs of currency manipulation in the months ahead.

But, Julius Baer note another compelling driver of CHF strength: improving economic fundamentals.

"The Swiss economy has recovered lately with a bottoming out of cyclical downward momentum," says Janwillem Acket, Chief Economist at Julius Baer. "The Swiss economy has again adapted to a stronger franc and now can live with a firmer EUR/CHF exchange rate below 1.10.

Acket cites evidence of economic resilience in the Swiss manufacturing purchasing managers’ index pushing back above the neutral level of 50 again in December.

The PMI read at 50.2, after eight months in contraction with a low in July of 44.7. The economist adds other forward-looking fundamentals like the KOF economic barometer look promising.

"Apparently, the Swiss economy has again adapted to a stronger franc and now can live with a firmer EUR/CHF exchange rate below 1.10, so the SNB can tolerate levels between 1.05 and 1.10 going forward," says Acket.

Foreign exchange markets have bid the Franc higher partly in reaction to the U.S. Treasury putting Switzerland on their watchlist for currency manipulators, in the belief that the move would ultimately force the SNB to be more cautious in intervening in currency markets to prevent the Franc from overheating.

However, it appears the SNB is yet to be daunted as Julius Baer have looked at the SNB's deposit data and ascertain the Bank has implemented "significant currency interventions", as recently as just last week when EUR/CHF tested 1.07. "This can be concluded from a rise of the deposits of domestic Swiss banks at the SNB of CHF 4.3bn last week alone," says Acket.

The interventions appear to have had little discernible impact on the currency, something that will likely only encourage those betting on further gains.

In addition, a combination of the economy's emergent resilience to CHF strength and the noises coming out of Washington could mean the threat of the SNB thwarting further appreciation could be waning.

Julius Baer revise their 12-month EUR/CHF forecast to 1.08, from a previous 1.10, and maintain a 3-month outlook unchanged at 1.08.


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