Swiss Franc Overvalued Against Sterling but Cheap Vs Dollar and Euro

  • Swiss Franc outperforming in major FX after inflation recedes in December
  • Discounting by inflation & interest rates suggesting GBP/CHF undervalued
  • Fairly valued between 1.1349 & 1.1668; USD/CHF & EUR/CHF expensive
  • USD/CHF better priced near 0.9079; EUR/CHF between 0.9487 & 0.9692 

Image © SNB

The Swiss Franc emerged as an early outperformer among major currencies in the opening week of the New Year but inflation and inflation rate differentials suggest that it may be overvalued relative to Pound Sterling while slightly undervalued against the U.S. Dollar and Euro.

Switzerland's Franc rose against many major counterparts in the latter half of the week after inflation fell further than was expected in a December outcome that is likely to be welcomed at the Swiss National Bank and which supports the Franc's conceptual value against peers. 

"If one takes the SNB by its word, for now, we do not need to expect further interventions following yesterday’s inflation data," says Esther Reichelt, an analyst at Commerzbank, while writing in a Thursday market commentary. 

"Of course, that is just a snapshot. Renewed significant price pressure is expected for January when electricity suppliers and health insurers implement their annual price adjustments. Fears of second round effects therefore remain acute for now," she adds. 

Reichelt warned on Thursday that December's -0.2% fall could yet be reversed in January's inflation numbers with hawkish implications for SNB interest rate and exchange rate policies but said the bank is likely to be content sitting on the sidelines of the market for now.


Above: GBP/CHF shown at hourly intervals. Click image for closer inspection. 

 

 

The SNB raised its cash rate from 0.5% to 1% in December and said it had been intervening in the currency market to prevent the Franc from weakening in a way that would add to inflation in Switzerland while warning that inflation could remain above its 0% to 2% target until 2024 without further action.

"The SNB has a clear strategy to shield Switzerland from imported inflation, and inflation rates are still quite high in its main trading partners' economies. One element of tightening is a steady appreciation of the nominal Swiss franc," says Thomas Flury, an FX strategist at UBS Global Wealth Management. 

"The SNB has done that quite successfully in 2022. Strong CHF appreciation has not led to complaints by exporters or the tourism industry the same way it did in earlier appreciation cycles," Flury writes in late December research. 

The risk is that Swiss inflation rises afresh in the months ahead, leading the SNB to raise its cash rate again and seek to further bolster the Franc, although inflation and interest rate differentials suggest the currency is already overvalued relative to the Pound. 

This is because discounting directly from the January 2022 level of GBP/CHF using the latest available inflation and interest rates suggests the Pound ought to be trading up around 1.1668 against the Franc, while a cross-currency triangulation approach suggests a better price would be 1.1349.


Above: GBP/CHF shown at daily intervals. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.


"There has already been a notable decline in market-based measures of expected UK inflation. However, this adjustment is not unique to UK," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

"What is more striking is the fact that the OIS curve prices in roughly 40bps of Fed rate cuts in the second-half of the year but less than 10bps of easing from the BoE," Gallo writes in a Thursday market commentary. 

GBP/CHF was trading in the upper half of the 1.1349 to 1.1668 range last month but fell notably following December interest rate decisions from the Bank of England (BoE), European Central Bank (ECB) and SNB.

Meanwhile, the Euro and Swiss Franc strengthened broadly against many other currencies, although this price action has left both EUR/CHF and USD/CHF overvalued if discounted from January 2022 levels using the latest inflation and interest rates.

This suggests USD/CHF would be more appropriately priced at 0.9079 and that 'fair value' for EUR/CHF is somewhere between 0.9487 and 0.9692.  


Above: GBP/CHF shown at weekly intervals alongside USD/CHF and EUR/CHF. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.