Swiss franc could fall further, analysts say

Speculation is mounting that the Switzerland’s central bank may move to further weaken the franc as foreign exchange markets sold off the Swiss currency this week.

Swiss franc could fall further, analysts say
Photo: Michael Faes

The franc on Wednesday fell to its lowest level against the euro since December 2011 as investors ditched it in favour of other currencies.

The euro peaked as high as 1.24 francs in foreign exchange trading early Wednesday after trading for months in a narrow band close to the 1.20 floor set by the Swiss National Bank in the autumn of 2011.

Traders say the move is due to improved sentiment about the eurozone following comments made last week by the European Central Bank after it held off cutting interest rates, already at a record low 0.75 percent.

ECB President Mario Draghi said economic activity in the struggling area should “gradually” recover later in the year.

Since then, the euro has gradually increased in value against the Swiss franc and other currencies, although the move is tentative.

Uncertainty about the real state of the European economy dragged the euro lower against the US dollar, Daily FX reported.

The Swiss franc strengthened slightly against the euro in late Wednesday morning trading when the euro was valued at 1.236 francs.

The currency’s downward move has led some analysts to believe the Swiss National Bank will lower the 1.20 floor it set for the franc in September 2011.

Since then the central bank has intervened in FX markets to ensure the franc, which it says is already overvalued, does not further appreciate.

A strong franc hurts the Swiss economy by making its exports more expensive.

Citigroup’s foreign exchange team told the Financial Times that the “combined impact of (an) improving outlook for the eurozone periphery and the newly introduced penalty rates on franc deposits” could make it easier for the SNB to take further action to weaken the franc.

Rudolf Minsch, chief economist for the business lobby group economiesuisse, said the change away from a “fixed peg” for the franc is positive news.

“Financial markets are starting to believe that the franc is over-valued,” Minsch told World Radio Switzerland.

The Swiss currency jumped in strength in 2011 when jittery investors sought it as a safe haven against concerns of economic problems in Greece, Spain and other European economies.

At one point it flirted with parity against the euro before the SNB intervened.

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Why is the demand for 1,000-franc banknotes growing in Switzerland?

Large-denomination banknotes, like the 1,000-franc note, are rarely used for everyday transactions in Switzerland. So why are they becoming more popular?

Why is the demand for 1,000-franc banknotes growing in Switzerland?
The kind of banknotes the Swiss like to stash away. Photo by AFP

The demand for 1,000-franc notes has risen in the past months, data from the Swiss National Bank (SNB) indicates.

CHF1,000 converts to approximately €925.75, £824,63 or $US1126.98. 

Whether withdrawing the money from an ATM machine or directly from a bank, customers request large-bill denominations more often than before.

“We do know there is more cash being currently withdrawn in large notes, but it changes hands less often” Sarah Lein, a monetary policy expert from the University of Basel told SRF public broadcaster.

This means the money is not being spent but stashed away.

“We can conclude that some large notes end up in a safe”, she added.

READ MORE: Switzerland’s economy forecast to recover 'from summer onwards' 

The reason, she said, is that many banks charge their customers negative interests on large deposits.

“Therefore, it could be cheaper to simply withdraw the cash in large notes and keep it in a safe, especially since inflation has been extremely low for a long time”, Lein added.

This is not unusual — in times of crisis, more cash is often in demand.

But could this cause the shortage of 1,000-franc bills?

That is not likely to happen, Lein pointed out.

“Both the central and commercial banks have enough cash stored in their vaults to meet such demand. So there is always enough money available”, she said.

There is about 48.6 billion francs floating around in the form of 1,000-franc notes, constituting 59 percent of all Swiss notes in circulation. 

It is the world’s second-largest denomination after Brunei's B$10,000 note.

READ MORE: What do people in Switzerland spend their money on?