In their latest commentary, the two experts at Wellershoff & Partners said the franc will slide from its current high valuation levels versus the currencies of its most important trading partners.
‘It is clear that the periods of over and undervalua¬tion of the Swiss franc versus the euro and its prede¬cessor currencies are not equally distributed. In our opinion, this asymmetrical distribution is a clear indication that the SNB has always conducted monetary policy that targeted the exchange rate,’ they said.
‘Taking history into account, the probability of a further decline of the euro/Swiss franc exchange rate is highly unlikely, whereas we find an increase much more probable,’ they added.
Unlike other analysts who believe that European QE represents an incontrovertible argument for franc strength, they think it’s not going to be the case.
‘Why the ECB’s expansive monetary policy should strengthen the Swiss franc simply eludes us. The massive QE-driven money supply expansion in the US had no noticeable effect on the dollar’s exchange rate, but the franc’s fanatics seem not to have noticed,’ they said.
‘Also, the fact that the ECB has been the least expansionary central bank of the larger currencies till now is also blithely ignored,’ they added.
Financial stability in danger
Wellershoff and Brill think the SNB’s negative interest rates are endangering the hard-won financial stability of the country.
‘Negative interest rates pose an almost insoluble challenge for Swiss banks: either they pass on the negative rates to their clients, or they keep interest rates at zero and absorb the losses imposed by the negative rates,’ they said.
They added that the effect of negative rates assure that the consequences of the franc’s peg to the euro will be felt for a long time to come.
‘The surging franc has steeply devaluat¬ed the country’s large foreign currency reserves, accumulated over the course of defending the franc-euro exchange rate,’ they said.
Time for carry trades
Given that, according to the two economists, the franc will depreciate in the near future, Wellershoff and Brill unveiled three positions to benefit from this trend.
‘Export-oriented companies active in the eurozone should no longer hedge those revenue flows. Conversely, import-oriented companies seeking to continue their offering for at reasonable price levels should endeavour to secure favourable exchange rates now,’ they said.
They also think it is worth remember¬ing that simply holding cash in a foreign currency may be more rewarding than buying riskier assets like stocks.
‘For investors with a home currency other than the Swiss franc, it might be interesting to consider bor¬rowing money in francs. The fundamental data signal that a real investment opportunity exists at the franc’s current level of overvaluation’, they said.
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