As the world’s top investment manager, I always look at the big picture when analyzing market movements. In 2020, the Swiss Franc (CHF) has shown impressive strength, appreciating by nearly 15% against the Euro and over 18% against Switzerland’s trading partners, according to Commerzbank’s Head of FX and Commodity Research, Ulrich Leuchtmann.
Is the CHF Overvalued?
Despite the significant appreciation, there is no evidence of excessive strength in the CHF. The strong performance of the CHF is a reflection of Switzerland’s resilience to the global inflation shock. While inflation did rise in Switzerland due to the pandemic, it pales in comparison to other economies. For example, the USA saw a price increase of 9.1%, the Eurozone 10.6%, and the UK 11.1%.
When adjusted for inflation differences, the real effective exchange rate (REER) of the CHF only increased by 4.6%, similar to the Euro. This indicates that the CHF’s strength is not unwarranted, as it is primarily a result of other currencies losing purchasing power against the franc.
Analysis and Implications for Investors
For investors, the strength of the CHF may present both opportunities and challenges. A strong CHF can benefit Swiss exporters and companies competing with imports, as it makes their products more competitive globally. However, it can also pose risks for Swiss companies with significant exposure to foreign markets, as their profits may be eroded when converted back into CHF.
Overall, while the CHF’s strength is not excessive, investors should carefully monitor currency movements and consider hedging strategies to manage risks effectively. Understanding the underlying factors driving the CHF’s performance is crucial for making informed investment decisions in a rapidly changing global market.