Swiss Franc Strengthens Safe Haven Status Amidst Global COVID-19 Outbreak

Swiss Franc Strengthens Safe Haven Status Amidst Global COVID-19 Outbreak

Published: March 5th, 2020

The spreading coronavirus outbreak is making the Swiss franc an attractive safe haven for investors, pushing up its value and prompting central bank action, according to the Swiss National Bank (SNB).

SNB vice-chairman Fritz Zurbruegg told the press that the virus’s spread will have a direct, impact on the country's economy – and is already fuelling increased demand for its currency.

When asked about the franc's recent spike against the euro, Zurbruegg said the bank’s analysis indicates that market skittishness due to the coronavirus is having a direct effect.

‘In times of global uncertainty, the franc is often seen as a safe haven’.

In an effort to curb the epidemic, Bern has already invoked the country’s Epidemics Act to ban large events of more than 1,000 people. Numerous public festivals like the Spring Fasnacht parades and the world-famous Geneva car show have all been cancelled.

The Bundesrat has declared an emergency under the country's Epidemics Act, as confirmed coronavirus cases in the country rose to 63, placing it amongst the top 20 countries in the world in terms of infection rates.

Curbing the franc’s rapid rise

SNB’s data released in early March suggest the bank is taking action in the foreign exchange market to stem the franc’s spiking valuation.

Sight deposits, the cash that commercial banks place in the central bank overnight, rose to 595.7 billion francs from 592.2 billion the previous week.

The 3-billion sight deposits increase came as the franc rose to its highest level against the euro in four years. Deposits had jumped by 2 billion francs the week before that.

An analysis from Credit Suisse concluded that SNB interventions are likely to continue and could increase. ‘The bank is demonstrating its presence in the market and signalling that it wants to prevent the franc from appreciating too quickly.’

Its assumed that the SNB will avoid additional interst rate ciust if it can – already at minus 0.75 per cent – though pressure will increase if other central banks drop rates to stop coronavirus-induced economic slowdown.

It’s widely acknowledged that the SNB’s 2019 campaign to weaken the franc, building up substantial foreign currency holdings, helped the central bank post its second-biggest profit that year.

The SNB has acknowledged rising economic risks for Switzerland from the broadening virus outbreak. The Secretariat for Economic Affairs in Bern is expected to lower its growth forecast in mid-March.

Fighting perceptions of currency manipulation

Switzerland's inclusion on a US currency manipulation watchlist might be expected to discourage the SNB from stemming any rapid rise in the franc’s value. But as Switzerland's economy is export-reliant, the central bank may have little choice but to act.

In an interview with Swiss newspapers in early March, SNB VP Zurbruegg said any accusations that the country is seeking to keep the currency weak for competitive advantage is untrue.

"The course of our monetary policy remains unchanged, and we continue to use our instruments consistently," referencing the bank’s use of negative interest rates and forex market interventions.

‘Swiss interest rates are somewhat lower than abroad. This is a crucial prerequisite for diminishing the franc’s attractiveness of," Zurbruegg added. ‘If monetary conditions suggest further adjustments are needed, we will lower the key rate further.’

How the franc came to be seen as a safe haven

The franc's attractiveness as a safe haven for investors is driven in part by the longstanding stability seen in Swiss politics and financial structures. The country’s low inflation rate is seen as a positive, and markets perceive that the SNB has a firm hand on the tiller where currency markets and interest rates are concerned.

In the 2008 financial crisis, the franc gained appreciably as investors left risky assets behind and shifted investments to franc-backed investments. When the European debt crisis escalated in 2011, the franc’s value spiked sharply against the euro – so much so that the SNB took steps to support the euro and maintain a favourable exchange rate.

The bank aimed to lower the franc’s value to maintain price competitiveness for Swiss exports. Controversially, the Swiss National Bank purchased euros using Swiss francs explicitly printed for the action.

Studies have shown that the franc tends to appreciate when stock market indices are declining due to economic worries. During times of low financial stress, the value of the franc is affected more by fundamental factors like inflation. As a result, markets have concluded that the franc is a safe haven in unsteady times.

The printing of money during the European debt crisis became a political hot potato in Switzerland, leading to accusations by politicians and pundits the SNB was risking a period of high inflation.

The bank held course however until 2015 when it ceased providing support for the euro. The European Central Bank (ECB)’s long-anticipated move to quantitative easing saw the ECB buy up government debt in Eurozone countries. With the loss of Swiss National Bank support, the euro has steadily weakened against the franc.

With the European debt crisis still unfolding, speculation about the viability of Greece remaining part of the regional currency, and the growing coronavirus outbreak, the Swiss franc will likely maintain its attractiveness as a safe haven.

According to investment house Lombard Odier, The franc has gained more than 10% against the euro since 2018, rising by more than 1.7 per cent while Germany and the wider eurozone saw weak or slower growth. Switzerland’s trade balance also improved as the SNB was able to provide support and help sustain demand for Swiss exports.

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