And for good reason. The euro has been hit harder by inflation but has benefited from the post-COVID economic recovery and could well appreciate against the Swiss franc, which is seen more as a store of value.
Find out how major banking institutions expect the EUR/CHF exchange rate to shift in the coming months and up to the end of 2022.
Please note: The trends described in this article reflect the forecasts and opinions of highly regarded institutions and should not be attributed to b-sharpe.
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An uncertain crisis context
Swiss and cross-border financial players have been closely monitoring the big banks’ and the market experts’ forecasts as to how the exchange rate between the euro and the Swiss franc will fluctuate. However, in recent months it has proven particularly difficult to make predictions.
The COVID-19 pandemic and the numerous restrictions put in place by various European governments—from the closure of certain businesses to the strictest confinement of the population—have greatly disrupted the economy over the past two years. However, lifting most of these restrictions at the beginning of the year created logistical bottlenecks, an inevitable consequence of a strong upturn in demand in the face of production that is still bogged down by health regulations and a lack of personnel.
While economic activity and growth did indeed return in late winter, supply difficulties and central bank support measures created global inflation. A generalized increase in prices inevitably impacted the currency market. Still, many experts considered this a mere blip in the market after two crisis years and unprecedented support from banking institutions.
However, the recent crisis related to the Russia-Ukraine conflict, ongoing since February 24, has once again upset the forecasts. With rampant inflation, especially in fuel and food prices, and an uncertain economic situation for the two nations involved in this war, it is difficult to predict what the exchange rate between the two leading currencies of the Swiss Confederation will be by the end of 2022.
Credit Suisse forecasts
At the beginning of 2022, an extensive survey of 1,100 Swiss companies conducted by Credit Suisse provides a good idea of how the EUR/CHF exchange rate is expected to shift in the coming months. The study specifies that of the companies consulted, 80% purchase a portion of their supplies using the single currency, while nearly 70% sell their products or services in Swiss francs.
In this instance, the financial players surveyed and Credit Suisse’s foreign exchange strategists all predict an end to the downward trend that the EUR/CHF exchange rate has displayed since 2017. They anticipate a slight appreciation of the euro against the Swiss franc. Companies expect the exchange rate to be 1.08 at the end of 2022 (compared to 1.05 at the end of 2021), while Credit Suisse is pushing this trend even further, forecasting a rate of 1.10.
Why will the euro appreciate so much against the Swiss franc in the coming months? The inflation situation, which is more prevalent in the eurozone than in Switzerland, suggests that the European Central Bank (ECB) will have to raise interest rates sooner than the Swiss National Bank (SNB).
Update: Against all odds, the SNB finally decided to raise its interest rates on June 16 (the first time since September 2007), raising them from -0.75 to -0.25%, in order to prevent the spread of inflation.
At the same time, use of the Swiss franc as a store of value, which contributed to its appreciation during the most challenging months of the COVID-19 pandemic, is expected to decrease, logically leading to a slight depreciation of the Swiss currency. Finally, as demonstrated in the past, the environment for economic recovery is favourable to the euro.
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The War in Ukraine and the anticipated inflation
The blind spot in these forecasts is, of course, the Ukrainian crisis. While Credit Suisse announced at the beginning of the year that inflation would be one of the three major parameters likely to influence the exchange rate between the euro and the Swiss franc, they could not have anticipated even higher prices due to an armed conflict in Europe!
While the Swiss economy is clearly better protected than the eurozone against this phenomenon, it has nevertheless called into question the SNB’s forecasts from last March. The latter anticipated an inflation rate of +2.1% for 2022 and only +0.9% in 2023, whereas it has already reached +2.5% in April. There is no doubt that this is a data point to monitor closely when forecasting shifts in the EUR/CHF exchange rate.
At the same time, the European Commission announced in May that it had revised its growth forecast downwards (by 1.3 points to 2.7% for 2022) and its inflation forecast upwards (by 3.5 points to 6.8% for the year) for the eurozone as a whole.
These trends are entirely due to the war in Ukraine and somewhat qualify the expectations made in the Credit Suisse survey conducted earlier this year. Indeed, weaker European economic growth and rampant inflation, particularly in energy prices, could limit the euro’s appreciation against the Swiss franc.
The COVID-19 pandemic, supply difficulties, inflation and now the Russian-Ukrainian conflict…There is no doubt that these last two years have been eventful for the markets! Although the major banks expect the euro to appreciate slightly against the Swiss franc over the next few months, it is difficult to say with any certainty in this context.
In any case, all banking institutions encourage companies to hedge against currency risk, given the vagaries of the market. To do so, do not hesitate to ask for b-sharpe’s specialized assistance!