A long-ago theatre director would, during rehearsals, tell his cast to practise again the scene in question. “I want it,” he would say, “the same but different.”
The euro and the Swiss franc, also known as the CHF, the two most distinctive currencies on the European continent, are very much the same – but different.
The similarities reside in the fact that both are “hard” currencies, both are sought after by investors and both are safe-haven assets. The euro and the franc are issued by jurisdictions that respect contract and property under the rule of law.
Zero interest in world role
Yet they sit at opposite ends of the spectrum in terms of size and currency management. The euro is a multinational denomination deliberately established to be a reserve asset, to, in a phrase going around Brussels at the time of its launch, “look the dollar in the eye”. It serves 19 countries, so its monetary policy needs to balance the needs of several very different economies.
The Swiss franc is a national currency managed in Swiss interests, and the authorities have refused to allow it to become a reserve currency. They have precisely zero interest in looking the dollar in the eye (or anywhere else) and when, in the turmoil of the Seventies some suggested the CHF should replace the dollar as the world’s anchor currency, the Swiss authorities made clear this was not going to happen.
Running an anchor currency brings responsibilities to countries other than one’s own, as the US has found. Not that America always discharges those responsibilities – in 1971, then Treasury Secretary John Connally told a meeting of advanced nations: “The dollar is our currency but it’s your problem.”
Steady rise of the franc
So, as we enter another year, what should be the euro to CHF forecast 2021?
Maybe it’s best to start by looking at the recent performance. On the morning of January 15, the “Swissie” was trading at €0.93.
One month earlier, it was at the same level, and a year earlier, on January 18, it was, again, at €0.93.
During the 12 months, the low was seen on June 6, at €0.92, and the high was of €0.95 – reached on May 12. What little momentum there is would seem to indicate slight weakening of the CHF, but it is hardly conclusive.
Some may be tempted, when making a euro/CHF prediction, simply to forecast that the franc will end 2021 where it is now, at €0.93. But that may well be a mistake, as a little history shows that there are longer-term trends at work that suggest a slow, steady but inexorable rise in the CHF in relation to the euro.
On September 19, 2003, the franc traded at just €0.64. It had reached €0.70 by March 26, 2010 and €0.82 June 17, 2011.
By March 6, 2015, it was trading at €0.93.
It is important to remember two things about this period. The first is that the CHF came off its own “gold standard” in 2000, becoming just another paper currency with no bullion backing. It may have been expected that this would weaken the franc, but, certainly against the euro, this has not happened.
The second is that, in the years after the 2008 financial crisis, the Swiss authorities took active measures to hold down the value of the franc. Investors panicked by the carnage of the Great Recession flooded into the CHF, pushing up its value.
Despite the caricature that all Swiss people work in banks or for the United Nations – Geneva is the UN’s second city, after New York – the country has a thriving manufacturing sector whose exports would be harmed by an over-mighty franc.
For those senior German bankers and politicians who were always sceptical about the desirability of swapping the German mark for a share of the euro, the euro/CHF chart since the early 2000s would be grim confirmation of their fears that a currency serving the likes of Italy and Greece – or, indeed, France, whose own franc was, in years gone by, devalued early and devalued often – could never be “hard” in any real sense.
That said, the mark’s record against the CHF was nothing to boast about. Between 1972 and 1997, it lost about a third of its value against the franc.
The mark was “ultra hard” only in relation to currencies such as sterling or the Italian lira, not up against the hardest currency in the world.
More ambition for the CHF?
What, then, is the euro/CHF outlook? All currencies are currently under the shadow of the coronavirus, and both CHF and euro interest rates look set to stay very low for some time, so let’s look at specific factors that influence their performance.
One is trade. The Swiss economy is highly dependent on trade with the European Union, especially the euro-zone. A sluggish trading performance would reduce demand for the franc, as would a worsening trade balance with the single currency bloc.
Another is growth. In its most recent World Economic Outlook, the International Monetary Fund forecast eurozone growth of 3.1% this year and 1.8% in 2025, while Swiss expansion was predicted at 3.6% this year and 1.3% in 2025. Honours more or less even, then, with the Swiss leading this year and the euro-zone in 2025.
What is the downside for the CHF? Well, ultra-hard currencies have come to grief. Until 1983, the CHF had for decades a rival as the world’s strongest denomination: the Venezuelan bolivar. The latter has been devaluing ever since and you currently need 1,818,012.30 bolivars to buy one euro.
Let’s assume this sort of calamity is unlikely to be visited on the CHF, and that the country’s cohesion and economic success remain in place, a sensible forecast would be for further gains, to perhaps €0.96.
Or perhaps we should be more ambitious and talk of parity – one franc equals one euro. Impossible? Not at all. It happened briefly in January 2015.