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The Swiss Franc: A Better Hedge Than Gold?

On January 15, 2015, the Swiss National Bank (SNB) made a shocking decision to doff the EUR/CHF floor of 1.20, which sent the Swiss franc soaring versus the European currency. The bank also slashed its official interest rate to a historic low of -0.75% to discourage investments and ward off de-growth pressures.

Chart: Value Of The Euro Against The Swiss Franc

Source: https://www.tradingview.com/x/gkF1JOyU/

Practical Analysis:

As seen from the chart, the Swiss currency has gained against the Euro since the post-recession era. As the Eurozone debt crisis of 2009-2010 gained prominence, investors rushed to safety in Switzerland, which has often been considered the safe-haven for investments. This massive flight-of-capital out of the Eurozone and into the Swiss economy greatly appreciated the Swiss franc versus Euro and US Dollar. This made Swiss exports much more expensive. Hence, to protect the interests of the exporters, the central bank decided to place a cap on EUR/CHF. Switzerland exports 56% of the goods it produces into European countries.

The SNB’s decision came just days before the ECB announced a vast asset-purchase program. Many analysts anticipated that the quantitative easing by the ECB would lead to huge money flowing into safer investments such as the Swiss franc and hence, it would become incredibly hard for the SNB to defend the EUR/CHF cap.

The decision to push the interest rates deeper into the negative territory is also aimed at curbing the “hot” foreign investments and kick-start the spending cycle. The negative rates make the bank-deposits unworthy and could stem a further rise in the Swiss franc.

The SNB, in its January 15 announcement (full report here: http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_20150115.en.pdf), also stated that exchange rates would continue being a key consideration while formulating monetary policy in the future. It also clarified that, if the situation demands, there would be no hesitation in intervening in the foreign exchange market to prevent the franc from getting overvalued.

So if you ask me, the Swiss Franc is not only a better hedge than gold, but a good investment too. And it could continue to be so for a very long time.

Written by: Nikhil Gupta (Financial Markets Analyst/Writer)
Twitter: @nikhil9154

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