Franc at new record high against the euro

The franc has risen to another record high against the euro. In the early Thursday afternoon, only 0.9532 francs were paid for one euro at times. This was the lowest level since the euro was launched. By the evening, the euro had risen above the CHF 0.96 mark again.

Since the beginning of the year, the euro has lost more than 8 percent of its value against the Swiss franc. The reasons for the weakness of the euro are the poor prospects for the European economy as a result of the gas crisis and high inflation. Against the Swiss franc, the Swiss National Bank’s (SNB) imminent interest rate hike on September 22 and the status of the Swiss franc as a safe haven will also have an impact.

dependence on Russia

With the strength of the franc against the euro, Europe’s energy dependency on Russian gas plays an important role. According to Sven Schubert, investment strategist at Bank Vontobel, the stocks are relatively well stocked on average in the EU at 60 percent. However, it is questionable whether energy rationing can be avoided this winter. In a normal winter, the EU consumes around twice the amount of gas currently stored. Ultimately, it also depends on the course of the winter and the use of possible alternative energy sources as to whether an energy crisis can be avoided. However, such a move could plunge the European economy into recession.

Bank Lombard Odier expects gross domestic product (GDP) to fall by 1 percent in the euro zone in 2023. However, a lot depends on how the winter goes and how easily the gas supplies can be replenished.

Ukraine war reshuffles the cards

The economists at Bank Raiffeisen meanwhile point out that the massive increase in gas and electricity prices as a result of the Ukraine war has pushed up costs in Europe and is weakening Europe’s competitive position. This can be illustrated by the terms of trade, which have deteriorated for Europe because import prices have risen faster than export prices. According to the Raiffeisen economists, Switzerland is less affected than the euro zone because of its lower gas dependency and energy intensity, which is reflected in the euro-franc exchange rate.

The poorer competitiveness of the euro zone compared to Switzerland is also reflected in the fair value of the Swiss franc, measured in terms of purchasing power parity. According to Schubert, this has risen by around 30 percent from 1.21 francs per euro since 2020. As a result, the franc has become “cheaper” despite the appreciation.

In the past few months, the euro zone has been hit by a strong inflationary shock, which is also reflected in the development of the euro-franc exchange rate. According to Schubert, producer prices in the euro zone have risen by around 50 percent since the end of 2020, but by only 6 percent in Switzerland. This reflected the poorer energy diversification of the euro zone and the greater importance of industry for the European economy.

Before the SNB rate hike

After the SNB’s decision in mid-June to raise the key interest rate by 0.5 percentage points to -0.25 percent, the franc appreciated particularly significantly against the euro. The central bank surprised the financial markets with the rate hike, with which the SNB wanted to curb inflation, which had also risen in Switzerland. Market observers are now expecting another significant increase for the SNB’s monetary policy assessment on September 22nd.

At the beginning of September, the European Central Bank (ECB) also increased its key interest rate by 0.75 percentage points to 1.25 percent. In the euro zone, however, inflation is still at different levels than in Switzerland. In August she is up from the previous year increased to an estimated 9.1 percent.

The forthcoming parliamentary elections in Italy on September 25 are considered to be another factor for the weakness of the euro and the strength of the franc. The polls point to a victory for the right-wing parties Fratelli d’Italia, Lega and Forza Italia. Representatives of the fund company Candriam assume that such a coalition would support more budget spending and tax cuts, coupled with a poorer economic environment.