Decoding Currency Strength: Euro Vs. Swiss Franc – Trends And Analysis
The currencies of different countries constantly fluctuate in value against each other. Understanding these movements provides valuable insights.
With these practical takes, it is possible to analyze and compare the strengths of two major European currencies – the Euro and the Swiss Franc. Both currencies play an essential role in the global financial system.
Read on to discover the currency strength of Euro Vs. Swiss Franc.
1. Exchange Rate Charts
Exchanging one currency for another always involves comparing their values. Looking at charts tracking the Euro vs Swiss Franc exchange rate over the past decades provides your first clues.
In the 1990s and 2000s, one Euro could buy around 1.5 Swiss Francs on average. However, after the 2008 financial crisis, the Franc appreciated sharply against the Euro. By 2015, parity was reached, where 1 EUR = 1 CHF. This indicated the Franc had strengthened significantly relative to the Euro.
More recently, the exchange rate has fluctuated around the 1.05 mark. Therefore, in the past 10-15 years, the Franc has demonstrated greater purchasing power when changing currencies. But what economic drivers lie behind these exchange rate movements? To better understand the underlying currency strengths, we must examine influences like interest rates, inflation, debt, exports, and monetary policy approaches.
2. Interest Rates
Interest rates are a vital consideration for currency traders and investors. Generally, higher-rated currencies see more capital inflows as financial returns are more attractive.
After the 2008 crisis, the European Central Bank and Swiss National Bank cut rates close to zero to stimulate growth. However, the SNB has since raised rates more often than the ECB. For example, Switzerland’s policy rate reached -0.75% in 2020 compared to the ECB’s -0.5%.
Higher Swiss rates make Franc-denominated assets more appealing. This has supported Franc’s demand. Therefore, relative interest rate policies point to the Franc’s more robust fundamentals in recent history. The interest rate differential significantly explains the Franc’s appreciation trend against the Euro.
3. Inflation
Another economic factor currency traders weigh up is inflation. Currencies of countries with lower, stable inflation are preferable as they retain purchasing power over time.
While Eurozone inflation has fluctuated between 0-3% in the last decade, Swiss inflation has averaged around 0.5%. 2020 Swiss inflation was as low as -1.3% compared to 0.3% for the Euro area.
This underscores stability in Swiss prices versus higher volatility in the Euro bloc. Sustainable low inflation reflects well on the Franc and the SNB’s credibility in maintaining price stability. Meanwhile, periods of higher Eurozone inflation have weakened beliefs in the ECB’s abilities. The consistent beat of Swiss inflation outcomes points to underlying monetary policy advantages for the Franc.
4. Public Debt Burden
Government borrowing costs and debt sustainability are other metrics investors appraise. Before COVID-19, public debt as a percentage of GDP was far lower in Switzerland compared to the Eurozone. By the end of 2019, Swiss debt stood at 42% versus 85-90% for most Euro members.
However, 2021 data paints a more diminished contrast as the pandemic stimulus increased Swiss debt by 30%. Still, the Eurozone average exceeds 100%. Heavy debt loads may curb future policy flexibility and intensify refinancing risks, weakening a currency.
Based on debt trends alone, the Franc entered the coronavirus crisis on the sturdier ground regarding public finances. This grants it more leeway to weather future economic storms.
5. International Trade & Exports
For an economy reliant on trade, a stronger currency supports export competitiveness and the trade balance. Switzerland is a very open economy, and it requires a currency supporting external demand for its goods. Fortunately for Switzerland, the exports of chemicals, metals, and precision instruments have risen substantially in recent decades.
In 2020, exports comprised almost 50% of Swiss GDP compared to less than 30% for the Eurozone. Additionally, Switzerland consistently runs large trade surpluses unlike persistent Eurozone deficits prior to COVID-19. A currency geared towards bolstering trade is valued by markets.
Therefore, Switzerland’s export-driven growth model and robust trade flows suit the Franc well.
6. Economic Outlooks and Policy Responses
Several factors may influence future Euro-Franc rates. Growth prospects diverge as some Eurozone members like Italy and Spain contract chronically versus Switzerland’s surer rebound in pharmaceuticals and luxury goods industries.
If the Eurozone underperforms, the currency market may punish the Euro. Meanwhile, Swiss CPI should stabilize near zero, but Eurozone core inflation may persist, implying real rate differentials favoring Francs.
Fiscal and monetary stances also contrast. Switzerland gradually consolidates spending and low tax rates versus higher Eurozone debt. The SNB normalizes earlier than the dovish ECB, maintaining tighter Swiss conditions.
However, Switzerland has not been inoculated from imported inflation, pressuring its inflation target. Additionally, geopolitical risk aversion could still spur Franc safe-haven demand. A strong Eurozone services sector recovery could also support the Euro consumption recoveries, and lasting global growth could also aid the single currency.
Therefore, while near-term dynamics still lean Franc-positive, some two-way risks remain.
Conclusion
The analysis aimed to ‘decode’ the currency strengths of the Euro and Swiss Franc through charts, metrics and outlooks.
Interest rates, inflation, public finances, trade profiles, and monetary strategies have endowed the Franc advantages lately, appreciating it significantly against the Euro. However, the future likely holds challenges for both currencies depending on recovery momentum and policy choices.
Switzerland’s consistently solid fundamentals mean the Franc appears well-armored to withstand economic crosswinds. However, currency markets rarely evolve in straight lines so that two-way volatility may persist in the EUR-CHF pairing.
Continued monitoring of economic divergences will offer clues about longer-term currency adjustments.