French Debt Jitters Fuel Rush to Swiss Franc
(Bloomberg) — The Swiss franc is grabbing the spotlight as a haven against European risk after concerns about France’s debt situation hit the region’s markets.
The currency is poised for its best week since April last year versus the euro, in a surprise turnaround after struggling in recent months. Its fortunes have been changed by a flight to safety on doubts about France’s ability to reign in its debt ahead of elections next year.
The franc is traditionally a haven but traders had been shifting away from it on the possibility that Switzerland may keep its interest rate at zero, just as other countries are hiking. The latest surge suggests investors are willing to look beyond the currency’s non-existent yield and step in to buy when trouble starts to roil its European neighbors.
“When debt risk in the euro zone spikes up, the franc is always the preferred haven,” said Francesco Pesole, a currency strategist at ING Groep NV.
The currency has surged about 1.8% over just two days, taking the euro-franc pair to a two-month low of around 0.93 on Friday. Trading volumes on Thursday hit roughly four times the averages seen so far this year, according to CME Group Inc.
Options pricing suggests the rush into the currency has been the fastest in more than four years. Bullish sentiment for the coming year has now hit the highest levels since March.
The franc has long been considered a place where investors seek shelter during times of dramatic selloffs and increased volatility, given its historic links with gold, the ultimate haven asset. In addition, Switzerland tends to have among the lowest interest rates among developed countries, making the franc a go-to for funding carry trades when markets are calm.
Its low-yielding status has been in focus since July, on expectations that the Swiss National Bank may wait until the end of 2027 to start raising rates, which last month helped drive the franc to its weakest level versus the euro in more than a year.
What Bloomberg Strategists Say:
“Short-term Swiss franc rates are in negative territory, but there is a history of them going even further when the currency is in demand as a macro hedge. In contrast, expectations of more ECB rate hikes to come isn’t supporting the euro, reflecting concerns that it could be a policy error that actually harms the common currency. This may only be the start of a deeper dive for EUR/CHF.”
— Mark Cranfield, Markets Live Strategist. For more on the analysis, click here.
There’s now less chance for pronounced franc weakness, given the perception of brewing turmoil across its European neigbors, according to Michael Pfister, a currency strategist at Commerzbank AG.
The latest rally has come as a surprise to both Pfister and ING’s Pesole, who along with other currency forecasters had been expecting the market to wait until the run-up to general elections in France and Italy next year.
As the fiscal health of these countries gets scrutinized as they release financing plans for 2027, Pfister expects that Switzerland’s more balanced budget will attract further investors to its currency. He now forecasts that will boost it by more than 2% to leave the euro-franc pair weaker at 0.91 in a year’s time.
“With the budget season just starting, this topic will take center stage,” he said. “There are not many places left to hide, to be honest.”
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