The overvaluation of the Swiss Francs eases

26th March 2018
-News, IAM

Jean-Louis Richard, Senior Financial Analyst

The Franc has not lost its attraction as safe heaven, as shows its appreciation against the Euro in the beginning of 2018, time when financial markets declined. However, over a longer period, the depreciation tendency of the national currency is not questioned: over one year, the Franc has lost 9% compared to the single European currency. This movement has led the Swiss National Bank (SNB) to change its appreciation of the monetary situation. As a matter of fact, the Franc is not any longer qualified as “strongly overvalued”, but only as “highly valued”.

However, compared to the dollar, the second most important currency for Swiss foreign trade, the Franc has not weakened; on the contrary, it has strengthened by 5% over the last 12 months. The consequence is that the Franc has only weakened by about 2% compared all currencies. Such a modest decline does not justify a change in terminology by the SNB. Another factor has most certainly been taken into account: inflation.

Prices rise usually slower in Switzerland than in most countries. The reduced erosion of the value of money justifies that the Franc tends to appreciate. This is what the real exchange rate of the Swiss Franc tries to capture, or in other words, it shows the exchange rate adjusted for the differences in inflation between the countries.

According to this measure published by the SNB, the Franc has depreciated by 4% over one year, when taking into account consumer prices, and 6% when taking production prices. The drop is hence substantial and explains the evolution of the SNB. Over 10 years, the Franc in real terms has however appreciated by 16%…