'Safe haven' franc is an outperformer in 2020, but vaccine rollout changes things
The Swiss franc is a classic safe-haven asset, so it's no surprise that it became the second-best performer among the G10 currencies in 2020 – the uncertain and chaotic first year of the new century. While many European countries struggled to support their currencies, the Swiss National Bank (SNB) actually had to spend 90bn CHF to prevent the franc from appreciating too much.
As for the pound, it dropped by 4 per cent at the beginning of September, but after that performed better than many other major currencies, fueled by the optimism around a possible Brexit deal. Next, in the first half of November, CHF surged ahead of both pound and euro as Brexit negotiations stalled, pushing GBP/CHF down to 1.160. This is in stark contrast with November last year, when the pair traded around 1.288.
As the economic data for November was published on Dec 16, it turned out that the Consumer Price Index in the UK missed the mark, slowing down to +0.3 per cent year-on-year instead of 0.6 per cent . The retail price index (RPI) also missed the mark, coming in at 0.9 per cent instead of 1.3 per cent year-on-year. However, the Manufacturing PMI beat expectations, rising to a six-year high of 55.6. That, together with positive news about the Covid-19 vaccines, helped GBP/CHF climb to 1.217.
What made CHF lose ground in December?
After a short recovery, the Swissie sank again in mid-December, together with the Swiss stock market.
Two factors are keeping CHF under pressure:
- Concerns about economic growth: The State Secretariat for Economic Affairs now expects Swiss GDP to grow by only 3% in 2021, as opposed to the earlier forecast of 3.8 per cent.
- Growing Covid-19 infections: the second wave of the pandemic hit Switzerland hard, with the figure of 100 deaths a day reached for the first time. Many expect stricter measures to be taken around the New Year, and that will further hurt the economy and CHF.
Now that we've looked at the current fundamentals, it's time for a longer-timer GBP/CHF prediction.
GBP/CHF forecast: it's all about Brexit
At this point, what the Swissie needs is a no-deal Brexit. As we've seen, over the course of the past months every piece of positive news, however minor, about the Brexit talks was enough to get the market excited about the pound. So any sort of deal, even a rudimentary one, will seem exciting enough to investors to rush out of the safe haven franc.
How likely is a deal, though? The EU and UK leaders themselves are not sure. On December 16, after a new round of discussions with Ursula von der Leyen, Boris Johnson insisted that a no-deal Brexit is 'very likely', while the head of the EU commission admitted that it will be very challenging to reach an agreement on a few key issues, such as fishing rights. On December 17, Johnson said that there was 'every opportunity, every hope' for a deal – and yet on December 18 his own spokesman confirmed that the Prime Minister still views a no-deal outcome as very likely, because 'some fundamental areas remain difficult'.
If the negotiations fall through because of the fisheries issue, the pound will be in deep trouble. According to the head of Bank of England Andrew Bailey, a no-deal would hurt the UK economy more in the long-term than Covid-19.
Three more factors working in favour and against the franc
- Positive: US quantitative easing. As the US Federal Reserve continues to inject money into the US economy, the dollar will depreciate, pushing cautious investors to switch to CHF instead.
- Negative: Covid-19 vaccination campaign. Of course, the world won't become immune overnight: less than half of the UK population will be vaccinated in 2021, according to the UK National Audit Office, and only 10 per cent of the people in low-income countries, as per People's Vaccine Alliance. Still, the start of the campaign will be a major psychological factor boosting the appetite for risk, at least for a while. This doesn't bode well for the Swissie.
- Negative: reduced trade conflicts. Many expect that with the election of Joe Biden trade tensions across the globe will ease, especially those between the US and China. This is yet another risk-on factor that will play against the franc.
What do experts say?
According to Rabobank, even a trade deal won't be enough to generate long-term gains for the GBP. We might see a short-lived rally, but those investors who hope for a strong pound throughout 2021 will be disappointed. The Bank of England also wrote in its recent Monetary Policy Report that, judging by the volatility options market, investors “place more weight on a large depreciation than a large appreciation” of the pound.
HSBC is even more pessimistic about the pound. Its Head of European Forex Research stresses that even in case of a deal, non-tariff trade costs in the UK will still rise by up to 14 per cent and that post-Covid economic recovery will be slow. Besides, the UK actually needs a weaker pound to attract capital into the country, the HSBC pound to Swiss franc forecast points out.
MUFG Bank, too, expects CHF to remain strong in 2021, in spite of the potential headwinds like the Covid-19 vaccine rollout and a UK-EU trade deal. In particular, the analysts expect the franc to grow in correlation with gold prices.
On the other hand, Credit Agricole sustains that the franc is heavily overvalued and that GBP could rally to 1.25 by December 2021. UBS goes even further with a GBP/CHF prediction of 1.30 to 1.40 for the pair in 12 months.
In order to give a confident GBP to CHF forecast, it's necessary to have some clarity on Brexit and Covid-19 vaccinations. It's very likely that 2021 will be a hard year for the pound, even if there is a deal, while the Swiss franc will remain relatively strong – but not quite as strong as in panic-filled 2020.
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