New York/Edinburgh: Even after making the Swiss franc the most over-valued major currency, traders are betting on more strength as the European Union's sovereign-debt crisis begins to infect bigger economies.
The franc rose to a record last week against the dollar, euro and pound as bond yields in Italy and Spain surged to euro lifetime highs. The cost to hedge a drop in the euro versus the franc climbed to the most since January 2009, signaling concern the EU may fail to contain a crisis that has already forced Greece, Portugal and Ireland to seek financial bailouts.
While the Swiss National Bank highlighted its ability last week to resume sales of the currency to stem gains that threaten overseas sales at companies including ABB, traders are pushing the franc higher. Strategists boosted their fourth quarter median forecasts for the franc against the dollar by the most of 51 pairs tracked by Bloomberg.
"The Swiss franc looks like it will go to par with the euro," said John Taylor, founder of FX Concepts LLC in New York, the world's largest currency hedge fund. "The EU is not working on a real solution, just patches that only work for a certain amount of time. The franc will have the problem in the long run of money flowing into the country."
Taylor, whose firm manages $8 billion (Dh29 billion), said he has trades that would profit from gains in the franc against the euro.
Trade, unemployment
The franc is a favourite of traders because Switzerland has a current-account surplus, the broadest measures of trade, meaning it doesn't need to rely on foreign capital to fund a trade deficit like the US. The nation's 3 per cent unemployment rate compares with 9.9 per cent in the 17-member Eurozone, and the economy is benefitting from its proximity to Germany, which buys about 20 per cent of Swiss exports.
"The franc will remain a strong currency for a very long time because the credit crisis in Europe isn't going away anytime soon," said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale in London. "We are in a global crisis of growth and in that environment balance sheets that are clean are appealing. That's the case with Switzerland." Last week the franc strengthened 3.4 per cent to 1.15384 per euro, and advanced 2.6 per cent to 81.52 centimes versus the dollar.
It appreciated to all-time highs of 80.83 centimes per dollar, 1.14945 against the euro and 1.3056 per pound on July 14 as Moody's Investors Service cut the credit ratings of Portugal and Ireland to below investment grade and Fitch Ratings lowered Greece further into junk.
It's the best-performing currency against nine developed market peers in the past year, rising more than 16 per cent, according to Bloomberg Correlation-Weighted Indexes. Australia's dollar is next best, advancing 9 per cent.
Because of its trade ties, investors in the franc can participate in German growth without being penalised by the euro region's weakest members. Switzerland's economy may expand by 2.4 per cent this year, compared with 3.4 per cent for Germany, Bloomberg surveys of economists show. A separate poll shows that the Eurozone may grow 2 per cent.
The franc's strength has helped contain inflation, enabling the SNB to keep its benchmark interest rate near zero. The European Central Bank raised its main rate twice this year, to 1.50 per cent. Swiss consumer prices increased 0.6 per cent in June, compared with 2.7 per cent in the euro area.
Foreign-exchange strategists are raising their estimates for the franc more than any other currency, boosting their forecasts for the currency against the dollar by 9.1 per cent since April, according to data compiled by Bloomberg.
The median of 38 fourth-quarter estimates is for the franc to end the year at 1.26 francs per euro, from a prediction of 1.34 at the end of April, a separate survey shows.
- 3.4%: franc strengthened against euro
- 16%: franc rose against developed market peers