Franc sinks past psychological barrier

Switzerland's central bank has intervened in patches to keep to franc from over-appreciating Keystone

The franc-euro exchange rate slid to the symbolic CHF1.10 mark on Friday, the first time the Swiss currency has been valued so low against the euro since the Swiss National Bank (SNB) abandoned its peg in January.

Swiss exporters have been saying for some weeks that an exchange rate of CHF1.10 or above is necessary for many of them to make a profit. Since the SNB stopped defending its CHF1.20 low water mark, the franc has traded largely in a range of CHF1.04 to CHF1.09.

The recent change in exchange rate tempo has been driven by the strengthening of the euro as more European Union economies find steadier ground. And while the problems in the Greek economy remain, fears of a Grexit from the euro have died down since the early part of the summer.

Andreas Ruhlmann of the Geneva-based IG Bank said that it was “no longer unrealistic” for the exchange rate to reach CHF1.20 by the middle of 2016.

Ruhlmann believes that the franc will lose its allure as a safe haven currency if the eurozone recovery continues. He also credits the Swiss central bank for setting rock bottom interest rates for domestic savers and charging financial institutions to park their money at the SNB.

“It seems [the franc’s] “safe haven” value no longer justifies the high cost [SNB negative interest rates] of owning the Swiss currency,” he said in a note.

The SNB has intervened in the foreign exchange markets relatively little since ending its euro exchange rate cap. SNB foreign reserves rose 1.7% in August to reach a record CHF540.4 billion ($555 billion) but the vast majority of that mountain was a hangover from the last few years of more ambitious forex interventions.

Switzerland’s central bank is widely tipped to maintain its current monetary strategy when its policymakers meet for a quarterly meeting on September 17.