Will the Swiss Franc's Value Trend Upward in 2024?
17th of October 2023
Short-term Outlook: SNB is continuing to shrink its financial holdings
The value of the Euro (EUR) compared to the Swiss Franc (CHF) has gone up slightly over the past month, but it's still less than a 1% increase. Most of this change happened on September 21 when the Swiss National Bank (SNB) decided to keep interest rates at 1.75% instead of raising them, which most people expected (figure 1). However, the financial markets have adjusted to this new situation, and now they only see a small chance of one more rate increase, with a slight possibility of a rate cut starting later in 2024.
This is causing the value of the Euro against the Swiss Franc to slowly decrease again. We think the SNB will continue to support the Swiss Franc by other means rather than changing interest rates. Even though the Swiss Franc has one of the lowest interest rates among major currencies, the SNB is reducing its balance sheet, which is now at a level last seen in March 2017. In September, the SNB's reserves went down by 2%, a faster decrease than in August. We believe the SNB used the opportunity of some Swiss Franc weakness after the interest rate decision to further reduce its balance sheet. This means the SNB is focusing on selling foreign currency to keep the Swiss Franc strong.
Figure 1: Switzerland Interest Rate
Mid-term Outlook: Swiss Franc's 2024 strength may be offset by domestic stability and US economic trends
We expect the Swiss Franc (CHF) to become stronger in 2024 due to concerns about a global economic downturn. However, because households in Switzerland are doing well financially and people are earning more money, they might keep spending money even though central banks around the world are increasing interest rates.
There's been a decrease in the likelihood of a US recession in the next year according to Bloomberg analysts. It went from 65% last month to 55% now. If there is a recession, but it's not too severe, and the US Federal Reserve and other central banks don't make big cuts to interest rates, the Swiss Franc may not become much stronger.
The biggest risk for the Swiss Franc was if China's economy did much better than expected, but with each passing month, that seems less likely. So, we predict that the Swiss Franc will remain stable, without much change, unless something unexpected happens from outside the country.
Some people still mention the idea of selling the Swiss Franc because of its valuation, but when we look at the history of the Swiss Franc compared to the US Dollar, it hasn't been above its 'fair value' in the last 40 years, so it's hard to take that idea seriously.
