The Swiss government has welcomed this rules

Jonathan Webb, Head of FX Strategy, on the Swiss Franc

Signs are emerging that the recent price boom in Switzerland's property market is starting to ease as the government, the central bank and banks toughen up their lending rules. The Swiss government has welcomed this rules, and said while the rate of real estate price increases are slowing, the gains are still higher than earnings growth. However, the SNB and the government are worried many borrowers won't be able to afford higher mortgage repayments when interest rates rise, leading to repossessions and a sharp drop in property prices. Some economists mention that this in turn could threaten the stability of the banking system, in which mortgage lending forms a key component. Do you agree with the statement and consider this potentially a big problem?

I agree with the statement that Swiss house prices are extremely high and there is a risk that it could start to retrace. The bit that I would really disagree with is the prospects of higher interest rates in Switzerland. We anticipate a period of very low interest rates in the Euro zone, most probably culminating in the quantitative easing, and in that environment it is highly unlikely that Swiss rates will move away from zero. Moreover, the driver for the low rate in the Euro zone, is a risk of deflation, given that there is already deflation in Switzerland, that will make their problems even worse. Hence, it seems to me there is a little prospect of rates going up in Switzerland for a number of years.

What kind of events and decisions could determine the performance of Swiss Franc during this year?

To my mind in the circumstances where inflation is very low, it may indicate that the SNB becomes more vocal and threads to take action, which could lead to a weaker Swiss Franc. However, probably more important is when the Federal Reserve starts to raise rates next year, in particular, with the prospect of that later in the year. With the USD/CHF rising, I believe that will lead to a weaker Swiss Franc against the greenback, but will also push the EUR/CHF higher. Thus, in my opinion, it then makes Switzerland less attractive, when there is an interest differential in the US.

What are your forecasts for the USD/CHF and EUR/CHF for longer and shorter term and what kind of trends do you expect to see?

We expect to see the Swiss Franc weaken, it has obviously not moved very much so far, and it may take some time to witness the depreciation. Hence, in the short-term we do not look for too much of a move in the USD/CHF to 92-93 level and in the EUR/CHF up to 1.225-1.23. However, in the longer term we can see the USD/CHF back above parity, and we also expect the EUR/CHF heading up to the high of 1.20ties. Hence, I believe in the long term there is definitely a prospect for a weaker Swiss Franc.