© Reuters. FILE PHOTO: A projection shows a 100 franc note in a window in Zurich, Switzerland, December 16, 2021. REUTERS/Arnd Wiegmann/File Photo
By Naomi Rovnick and John Revill
LONDON/ZURICH (Reuters) – The prospect of a worsening conflict between Israel and Hamas and weak corporate profits have investors seeking safety with few safe havens left, while expectations of longer high rates in the United States hit investors. government bonds and the yen.
Enter the Swiss franc, a long-standing safe-haven asset that just hit its highest level against the euro since 2015, holding firm as its traditional rivals lose appeal.
Disappointing financial updates from companies such as European food giant Nestlé and US bank Morgan Stanley have increased investors’ risk aversion. Global stocks are down 1.6% this week, while Wall Street stocks lost 2% in two sessions.
“Markets are caught between a rock and a hard place, with a rise in risk aversion where bonds provide no protection,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers in Geneva. “Where is that risk aversion expressed when it cannot be expressed in bonds?”
Besides US dollar cash, only the Swiss franc and gold remain options, Ielpo said.
The euro fell to 0.9419 francs on Friday, its lowest level since the Swiss National Bank removed the franc’s peg to the euro in January 2015, down about 2.4% against the currency so far. of month.
The dollar has weakened about 1% against the franc this week and is heading for its biggest weekly drop since July.
In contrast, the dollar is at its highest level in almost a year against the Japanese yen – another traditional safe haven – and 10-year Treasury yields touched 5% for the first time in 16 years, moving money away from the low-yield currency.
Traders also perceive a higher risk of monetary intervention by Japanese authorities, and the resulting volatility, than any Swiss stock, analysts said.
The Swiss franc has gained more than 3% against the yen this month.
“It’s the differential fear between running into Swiss authorities and the (Finance Ministry) in Japan that is certainly magnifying the central bank’s strength,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
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Since the Hamas attacks in Israel on October 7, the Swiss franc – also known as Swissie – has risen about 2% against the dollar.
In contrast, the , which measures its value against a basket of currencies, remains broadly stable.
“The war in the Middle East has clearly led to a flight to safety that benefited the Swiss franc,” said Karsten Junius, an economist at J.Safra Sarasin in Zurich.
ING currency strategist Francesco Pesole said the next big level for the euro/Swiss franc was 94, with a possible short-term move to 93 given elevated geopolitical tensions.
Still, strong currency movements could attract the attention of the central bank, as large daily swings become more frequent.
For example, the euro fell 0.89% against the franc on October 13, its biggest daily drop since November 2022.
The Swiss National Bank declined to comment Friday on the value of the currency or possible interventions.
Since late 2022, it has been buying francs to prop it up, reducing the inflationary impact of rising raw material import costs.
Some analysts said the SNB, considered difficult to predict since it hit currency markets in 2015, could have an eye on abandoning currency support if exporters complain too loudly.
“A too rapid and high appreciation of the franc would be very difficult for Swiss exporters,” says Junius of J.Safra Sarassin.
But Pictet Asset Management chief strategist Luca Paolini said Switzerland’s high-value export industry was competitive enough to withstand the strong currency.
The SNB “will react only if the strength of the franc creates a situation where the risk of deflation is very significant and we do not reach that situation now,” Paolini said.
Economists polled by Reuters see Swiss inflation falling to 1.5% in 2024, from 1.7% currently and well within the central bank’s target range of 0-2%.
The Swiss currency could come under pressure if the U.S. economy fell into recession and U.S. Treasuries regain their luster, said Toby Gibb, chief investment officer at Artemis, although he called such a scenario unlikely.
“Ultimately, there is little reason to believe that in the current environment of resilient economic performance, strong workforce dynamics and sticky underlying inflation, yields should fall significantly,” he said.
