Swiss Franc: Hidden potential

On September 6th 2011, National Swiss Bank (SNB) decided to fix a ceiling on forex market price at 1,20 CHF/EUR. On the press release published by the swiss monetary authority, it asserted that the massive overvaluation of its currency was an acute “threat” to the country´s economy and added that this threat entailed deflationary risks so they were decided to avoid it conducting “unlimited” quantities of foreign currencies.

Since the beginning of financial crisis in 2007, the “safe haven” role that swiss franc has played, guided it to appreciate against euro almost continuously, with the exception of the Lehman´s collapse aftermath, when even safe assets had to be liquidated in search of liquidity. Euro periphery debt crisis caused this appreciation to quicken: till May 2010 swiss franc went up in value almost 20% against euro, since then (when the European crisis exploded) it went up in value an additional 40% (till reaching almost the parity on August 9th 2011) . There were different attempts and threats of intervention, but SNB finally decided to act on September 6th. After this (and with the exception of specific moments in time when the currency depreciated to 1,25 CHF/EUR) Swiss franc has stabilized around 1,20 CHF/EUR, oblivious to the depreciation of euro against other major currencies.

Given this imbalance in the CHF/EUR forex market, we have tried to calculate the “hidden potential” that Swiss Franc offers in its value vs euro due to the SNB intervention.

If we consider long term Swiss Franc valuations vs euro based on purchasing parity power (PPP) we must state that Swiss Franc is overvalued: +34% according to the OCDE´s model, +11% according to Bloomberg´s relative CPI model or +55% according to The Economist´s BigMac model (the only exception is relative PPI Bloomberg´s model that shows a -4,5% undervaluation). We consider this overvaluation due to its “safe haven” role that we think it will maintain till developed economies can solve their fiscal problems with autonomous growth, far away from this actual over-stimulation era.

Supossing this overvaluation will only correct in the medium to long term, and bearing in mind the depreciation of euro against other major currencies since the authority intervention we have reached a theoretical Swiss Franc “fair value” vs euro if SNB had not intervined. We have determined the average relationship between daily percentual movements in the CHF/EUR price with daily percentual movements of a theoretical average of the prices in USD/EUR, JPY/EUR and GBP/EUR in the period 06/29/2007 (just before the first burst of subprime crisis that forced some european “money market” funds to close in July-August 2007)– 09/06/2011 (when it was intervined).


The result is that, Swiss Franc vs Euro price should be around 1,095 CHF/EUR, which entails a “hidden potential” of revaluation near to 8%(as of August 3rd 2012), so if SNB decides to stop intervining forex markets could materialized automatically, so an EUR-based investor keeping some cash in CHF could think of this as a potential source of benefits that could become real if SNB decides to stop keeping artificially CHF/EUR price over 1,20.

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