There is a lot happening on the Swiss franc front as the effects of the sovereign debt crisis in the European Union spreads to the larger economies on the continent. The Swiss franc has taken over as the most over-valued major currency. But traders are expecting the Swiss franc to grow further in the coming days. However, this is also a worrying indication for the countries of the EU. As the franc-euro battle heats up, there are apprehensions that the EU is not doing enough to stem the debt crisis in the region. Already, Greece, Portugal and Ireland have signed out for financial bailouts.
John Taylor, the founder of New York-based currency hedge fund company FX Concepts LLC, admitted that the franc is likely to reach the same level as the euro. He criticized the EU for creating patchwork solutions rather than real long lasting solutions. He feels that this could translate into a longterm problem for the Swiss franc.
The rise in the value of the franc could affect overseas sales at companies. However, strategists are suggesting that the boost will continue. Traders love the Swiss franc because Switzerland is blessed with a current account surplus. The clean balance sheets are an attraction during a period of economic uncertainty. Unemployment in the country is low at 3 percent. Compare that with the 9.9 percent numbers in the EU zone. Earlier this morning, the Swiss franc surged to a record high of 80.33 centimes per dollar.
Over the past year, the Swiss franc has risen 17 percent. Coming in second among a group of developed market peers is the Australian dollar at 9.8 percent. Switzerland’s proximity to Germany ensures that investors in the franc can also safely participate in further German growth. The Swiss and German economies are poised to grow at rates 2.4 and 3.4 percent respectively this year. Also on the plus side, the boosted franc has helped curb inflation in Switzerland.
The expectation of foreign exchange strategists is that the Swiss franc will reach parity with the euro by the end of this year if the debt crisis continues. The franc is currently 38 percent too strong with respect to the euro according to the index of the Organization for Economic Cooperation and Development in Paris. However, analysts feel that the franc is, at 46 percent, the most overvalued currency.
A “negative currency effect” of about 87 million is a very real danger in the coming months. So it is no surprise that the Swiss National Bank is following the developments very closely. SNB has revealed plans to act immediately in case deflation becomes a risk. However, this might not be enough of a deterrent to investors keen to cash in on a growing franc.
The franc should continue to strengthen amid fears that Italy could be the next to be hit by the debt crisis. Last week, the premium for one-month options to sell the euro against the franc rose a great deal, reaching the highest ever since the last high of January 2009. The only thing that could stem the growth in the franc could be the growing risk factor as the currency gets stretched. Investors would be unwilling to invest once the risk increases.