2022 was not only turbulent on the stock and bond exchanges. There were also major price movements on the foreign exchange market.
When it was (physically) introduced at the beginning of 2002, the euro still cost 1.48 francs and in the years that followed it rose to over 1.60 francs. Temporarily passati: In mid-2022, the euro exchange rate fell below parity and marked a record low of CHF 0.9405 at the end of September. Only in January 2015, after the Swiss National Bank (SNB) lifted the minimum exchange rate, did the euro trade even lower. At that time, however, the common currency had quickly recovered above parity.
An important reason for the weakness of the euro is the high inflation differential between Switzerland and the euro zone. While inflation in Germany was 3 percent in November, prices in the euro area have recently risen by 10 percent. In addition, the Swiss National Bank (SNB) raised interest rates for the first time in June and have doubled them twice since then. The ECB followed in July. But economists accuse it of being too hesitant to combat inflation. In addition, the euro is suffering from the high level of debt in individual member countries.
Euro is strong when the economy is strong
According to Caroline Hilb, Head of Investment Strategy at St. Galler Kantonalbank, one important reason for the weakness of the euro is the ECB’s monetary policy. “The ECB overslept the fight against inflation,” says Hilb. Therefore, interest rate expectations are lower and at the same time inflation is higher. This combination of monetary policy and rising inflation weighed on confidence in the euro and thus the currency. In addition, the debt problem is also a reason for a weaker euro. “The common currency and its monetary policy have not yet found a recipe to stabilize them.”
In addition, the euro has a “cyclical character,” says Hilb. That means he is in demand when the economy is booming and stock market prices are rising. If the mood on the financial markets is good, investors are willing to take risks. On the other hand, the euro is under pressure when stock market prices fall, as happened recently. At such times, the Swiss franc and the US dollar appreciate. “These are both currencies that are sought after in uncertain times,” says the SGKB expert.
More rate hikes? There is “potential for surprises”
Thomas Heller, Head of Investments at Belvédère Asset Management, gives another reason for the weak euro. According to him, the eurozone is much more affected by the war in Ukraine than other regions. The conflict has also triggered an energy crisis that could plunge the European economy into recession. Above all, Germany, the largest economy in the currency area, is lame, adds Hilb. Unlike in Europe, Heller does not expect a recession in the USA and Switzerland.
The ECB has proven its ability to act in recent weeks, albeit late, and that should at least stabilize the euro, says Hilb. Nevertheless, the euro is likely to remain below par in 2023.
Because the ECB is now likely to raise its interest rates more than the Swiss National Bank because of the high inflation, the interest rate differential will widen, says Heller. That will support the euro. “My expectation for the coming months: sideways movement around the current level, with potential for surprises upwards,” Heller summarizes his forecast.
Euro divers under 92 centimes possible
The Bank Valiant also brings the weather into play. Just a few weeks of cold winter weather in Europe amid energy shortages could mean the expected economic downturn will be even worse.
In such a case, the ECB would probably abruptly halt its cycle of rate hikes. And this despite rising inflation again. Then there would probably be a “reunion” with the year’s low of 0.9405 francs, according to Valiant. Even a dip in the euro below 92 centimes is not excluded.
Finally, at Credit Suisse, you look at the SNB and its foreign exchange purchases. Should the franc lose value too quickly in the eyes of the SNB, i.e. the euro appreciate, the SNB should counteract this by selling foreign exchange, according to CS. “We are therefore sticking to our negative assessment of the euro with a price target of CHF 0.97 in twelve months,” summarizes the second-largest Swiss bank. (SDA)