The Swiss franc (CHF) has long been considered a stable currency in the global economy and is often purchased by investors when the stability of other foreign currencies is at risk due to adverse economic or political environments. The franc's stability is due to measures by the Swiss Central Bank to control the currency's value and Switzerland's political and financial stability.
Prior to January 2015, there was a minimum floor on the franc's value, which has since been removed. The floor supported an exchange rate between the euro and the Swiss franc of 1.20 CHF per euro. Since this floor was removed, the Swiss franc's value has dropped. The Swiss franc is an important currency in Europe; its strength, combined with low interest rates offered by Swiss banks, has attracted investments and mortgages from people in other countries such as Poland and the Baltic nations.
Switzerland's policymakers have mandated several institutions to oversee the proper regulation of the country's financial markets, including the Swiss Financial Market Supervisory Authority (FIMA) and the Swiss National Bank (SNB), which is responsible for carrying out the country's monetary policy. On the national level, Switzerland has a high degree of transparency in reporting financial information, and it makes available to the public a wide range of data in several languages to support and attract foreign investment.
Risks
Investment in Swiss francs for those holding American dollars is particularly attractive because there has been low short-term volatility in the exchange rate between the dollar and the Swiss franc. Since 1999, the average monthly change in the exchange rate of the dollar and the Swiss franc has been 1.95%, which is higher than the monthly change in exchange rate between the euro and the Swiss franc of 0.85%. From January 2015 to October 2015, one Swiss franc had an exchange rate between 93 cents and 98 cents in American currency. In the long term, the Swiss franc has declined in value against the dollar by 0.04% since October 2010, 45% since October 2000 and 15% since October 1995. The Swiss franc has shown cyclical periods of strength and weakness against the dollar. But movements of the exchange-rate changes have been gradual, with the strongest Swiss franc appearing in June 2001 after a five-year increase in strength.
An investor looking to place funds into the Swiss franc should do so with awareness of this enduring pattern of gradual volatility and low month-to-month volatility. An extended look at the Swiss franc shows that the currency has been on a decline from a high of $6.48 in December 1920; the currency hit a low of 89 cents in June 2014.
In 2014, the biggest purchasers of Swiss francs were Germany, the United States and France, with each country purchasing 21.2%, 14.1% and 8.5%, respectively, of Switzerland's total currency exports. The recent increase in strength of the Swiss franc likely reflects the increase in the SNB's total assets from 2013 to 2014 by 14% and an increase of banknote circulation by 2 trillion Swiss francs. The SNB increased the value of its foreign currency investments from 443 trillion Swiss francs to 510 trillion Swiss francs from 2013 to 2014.
The largest risk to investors at this time is that the time it takes the Swiss franc to regain strength will be extended in light of the overall recessionary behavior occurring in Europe. The recent low that the Swiss franc hit may be prolonged or amplified for a new record low in the near future in conjunction with poor developments in Europe. The eurozone has offered several overly optimistic projections for the future in the past five years.
In November 2015, SNB President Thomas Jordan stated that the Swiss franc was overvalued and that measures would be taken to intervene. The SNB's current monetary policy goals are aimed at achieving long-term results, but investors interested in the Swiss franc should consider how effective these measures might be in light of the failing economies in Europe, recessionary activity in Europe and the current negative interest rates on deposits in Switzerland. The effectiveness of a negative interest rate may be compromised when concurrently deployed with a weak European economy.
Jordan's statement suggests that a second correction of the Swiss franc is likely to make itself seen in the form of a low exchange rate. While this is positive news for long-term investors who may be interested in purchasing Swiss francs assuming that the nation's market cycle will promote future positive growth, it is uncertain if the measures taken by the SNB will be as successful as Jordan hopes they will be.
Rewards
Switzerland's interest rates are the lowest in the world as of November 2015 at -0.75%, after being stuck at 0% for several years prior. Despite retaining its reputation as a safe haven of currencies, the future outlook of the Swiss franc remains uncertain. There is little dispute of the overall strength and power wielded in European markets by Swiss banks, but the falling exchange rate of the Swiss franc in conjunction with the country's negative interest rate offers curtailed enthusiasm for investors. Recent moves to pour funds into the Swiss franc because of poor developments in other countries is a signal that investors are trading on negative fear of the future economy. Switzerland's economy depends in part on the rebound from former crises that have negatively affected global economies. Investors should not offer overly enthusiastic confidence in the Swiss franc before positive developments have hit the remainder of Europe.
The potential future reward for an investor exists in confidence in the SNB's current monetary policy to create an environment for long-term growth. Investors are waiting for overall improvement in European economies following low growth rates that have affected every nation in Europe due to the interdependent nature of Europe's economies.
