The Swiss Franc’s strength remains a problem for the rest of Europe

15th December 2011

The Swiss Franc has been strong

There are several reasons for this position but in essence it is one of the currency's in the world which has shown genuine strength. Regular readers will be aware that many currencies around the world have governments and central banks which are trying to devalue them or have been so doing with the UK pound and the US dollar being clear examples of this. At the moment with the weakness of some of the Euro zone countries which in the case of Greece I analysed only yesterday we are also seeing a weakening Euro as it falls below US $1.30 and £1.19.

So we have a conundrum as currencies are defined in respect to each other so that they cannot all fall! Well there have been two rising ones and I labelled them the "currency twins" back in 2010 and they are the Swiss Franc and the Japanese Yen.

Why has it risen?

Back on June 10th 2010 I gave two reasons which some eighteen months later are still true.

 

As money flees the euro zone and the Euro it looks for somewhere to go and Switzerland has a reputation not only for economic stability but stability all round and so money has gone into the Swiss Franc.

 

If anything this factor may be even stronger right now as we read of bank  deposit flight spreading from Greece to Italy and maybe even France. An example of this was the 6.8 billion Euros which left Greek banks in October alone. Another sign of the crisis was the downgrading of the French bank Credit Agricole by the ratings agency Fitch to A+ last night. For particular followers of criticisms of “Anglo-Saxon” ratings agencies there was wry amusement in that it was the partly French-owned Fitch which made the move!

 

Moving outside of Switzerland a lot of property and construction borrowing in Eastern Europe was denominated in Swiss Francs. It is not a good situation for these borrowers to see the flip side of the Swiss Franc appreciation ie. their debt has risen in their own currency. Quite what the regulators were doing in these countries to allow mortgages etc. to be denominated in this way escapes me… However it is not a surprise to me that we have seen signs of economic distress recently in Bulgaria and Hungary for this reason.

 

The description above is of something that has been called the “Carry Trade” where you borrow in another currency because it has lower interest-rates. At the time I wrote the article in June 2010 the Swiss Franc was at 1.379 versus the Euro.

 

Read more…

 

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