Most currencies in the world experienced a loss in value in the last two years. Behind this phenomenon were an increase in government spending, weaker economic activity, the war in Ukraine, supply-chain disruption, and monetary policy tightening by central banks. In this environment, the outperformance of the Swiss Franc over another six other European currencies—Danish krone, Norwegian krone, Polish zloty, U.K. pound, Swedish krona, and the euro — stands out.
The performance of the Swiss Franc is outstanding: right now, it’s 7% above its January 2019 level against the U.S. dollar. In the same time window, in contrast, the rest are all down: the euro by 5%; the Danish krone also 5%; the Norwegian krone 11%; the Swedish krona 13%; the Polish zloty 13%; and the pound 2%.
Even though all these currencies are subject to country-specific fiscal and monetary policy, there was one common factor that affected all of them: inflation. Indeed, the data show a negative correlation between inflation and currency performance.
From January 2019 to its recent peak, Switzerland’s inflation rate increased by 2.9 pp., Poland’s by 17.2 pp., Sweden’s by 9.6 pp., Norway’s by 4.4 pp., the eurozone’s by 9.2 pp., the U.K’s by 7.8 pp., and Denmark’s by 8.8 pp.
Over the last two years, the prices of two groups of products increased considerably: energy and food. It is precisely through these groups that we can analyze why Swiss inflation didn’t rise as much as that of other European countries.
Switzerland, unlike its neighbors, is characterized by low dependency on oil, gas, and coal to produce energy: 1% of energy production comes from these sources, while for Poland the figure is a whopping 86%.
In addition, Swiss agricultural food tariffs are considerably higher than in other developed economies. The average Swiss tariff on agricultural products is 42.6%. Therefore, the impact of food price increases abroad are lower than in countries where tariffs are low. Local Swiss products are (artificially) more competitive to begin with.
Finally, Switzerland has a strong institutional framework, which gives certainty to long-term investors, and even makes them consider the Swiss franc as a substitute for commodities. This means that investors are constantly demanding Swiss francs, whose value has to increase in order to clear the market. This is particularly evident during high-uncertainty periods. The currency serves, like the U.S. dollar, as a safe haven.
We expect the Swiss franc to continue performing well in the future, with lower volatility relative to its peers. However, its 2023 return might be low compared to other currencies, specifically those that considerably lost value against the USD and might have overshot during 2022. Mean reversion, after all, still applies.
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