Will the Swiss franc gradually lose ground over the summer ?
It doesn’t happen often, but the Swiss franc has been one of the weakest currencies among developed markets this year. Only the Japanese yen has fared worse. Swiss exporters, who had been hit hard by the strong franc in recent years, have welcomed this depreciation. For them, it’s been a relief to see the currencies of Switzerland’s main trading partners pick up so sharply against the franc since the start of the year. The euro – the currency that’s most important for Swiss trade – has gained over 7%, while the US dollar, which is also important for the Swiss economy, has risen by close to 9%. Swiss business leaders must be pleased that the Swiss National Bank (SNB) has loosened its monetary policy. With inflation clearly slowing, the SNB has decided to use its policy tools to bring down the franc. First, it intervened on the forex market. Then it cut interest rates well ahead of other developed countries’ central banks. The question now is whether the Swiss franc can fall any further given that it’s close to parity with the euro. Technical analysis of the graph of the euro against the franc suggests that once the franc reaches parity, the next target will be 1.05. But from a more fundamental standpoint, it’s important to look at inflation and interest rate differentials between Switzerland and the eurozone. For that, we’ll need to keep a close eye on the two central banks’ upcoming meetings. The European Central Bank (ECB) looks poised to cut rates for the first time at its June meeting. And if the SNB wants to further weaken the franc, it will have to follow the ECB’s lead and cut rates again in order to maintain the interest rate differential with the eurozone. The SNB’s next meeting is on 20 June. It will be an important one for Swiss companies and investors, as it will help to determine whether the franc can continue its downward trend in the short and medium term against higher-yielding currencies, such as the euro and the US dollar.
US equities will soon need to catch their breath
The S&P 500 levelled off last week, with nearly all sectors posting losses. The tech sector was the only exception. Investors applauded the latest earnings releases from companies like NVidia and Analog Devices, which pushed the Nasdaq Composite to new highs. But we think that US equities will soon have to take a breather after five consecutive weeks of gains. Tech stocks have hit new all-time highs, but so too have equity valuations more broadly. The P/E ratio on the S&P 500 is currently 21, which is expensive by historical standards. At these levels, it’s hard to imagine that multiples will be able to expand much more and further boost the stock market. On top of that, investors will probably soon start to worry about the negative impact of the Fed’s monetary policy, which is set to remain tighter for longer than expected.
This week’s figure : 1%
Japanese 10-year yields have risen above the 1% mark for the first time since March 2012. Bond market seems to be pricing in more rates hikes by the Bank of Japan.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
