In recent days, the Swiss franc has weakened significantly against the single currency. This comes against an increasingly divergent monetary backdrop in Switzerland and the eurozone.
While the Swiss National Bank (SNB) is keeping its policy rate at 0%, the European Central Bank (ECB) has raised rates amid renewed inflationary pressures.
This interest rate differential is making euro-denominated investments more attractive and weighing on the Swiss currency.
Another development could reinforce this trend: the return of the carry trade involving the Swiss franc.
This strategy consists of borrowing in a currency with low interest rates to invest in assets denominated in currencies offering higher yields.
“Hedge funds and other speculative investors are once again borrowing in Swiss francs, a currency with very low interest rates, to finance higher-yielding investments,” explains Daniel Varela.
The franc is therefore regaining its role as a low-cost funding currency, while the Japanese yen, traditionally used for this type of strategy, has become less attractive as interest rates in Japan have risen.
According to Daniel Varela, “this trend, which began this summer, has the potential to push the franc lower than previously anticipated”.
Despite rising energy prices, the inflationary backdrop remains different in Switzerland and the eurozone. Against this background, Daniel Varela does not expect the SNB to raise its policy rate at its next monetary policy decision.
The combination of persistently low Swiss interest rates and higher yields available abroad could therefore continue to weigh on the franc.
This environment has led Daniel Varela to consider a scenario that has become considerably less unlikely in recent months: a return to parity between the euro and the Swiss franc by the beginning of next year.
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