Zurich A look at the exchange rate of the franc against the euro and the dollar should actually worry Fabian Chiozza. He is CFO at the Swiss company VAT, a manufacturer of vacuum valves that are needed, for example, in the construction of chip factories.
Most of the products go to the USA, Asia and Europe. Chiozza confirms: “As a strongly export-oriented company, VAT is subject to a certain currency risk.”
The risk is greater than it has been for years: the Swiss franc is as strong against the euro as it was in 2015. The Swiss currency has also recently appreciated against the dollar. Nevertheless, Chiozza is relaxed: “Thanks to its global market leadership in vacuum valves, VAT hardly runs the risk of losing business to the competition, even with a strong Swiss franc.”
The self-confidence in the Swiss export industry is new: the abolition of the exchange rate corridor with the euro by the Swiss National Bank (SNB) at the beginning of 2015 triggered shock waves in the Swiss economy. Companies trembled for sales and jobs, the stock market collapsed. In the past five years, the exchange rate has settled between 1.20 and 1.07 francs per euro.
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But now it is back to the level it was when the franc was released: one euro is currently only worth 1.03 Swiss francs. In March 2021, the exchange rate was still 1.11 francs per euro – this corresponds to an appreciation of the Swiss currency by almost seven percent in less than a year.
Franc parity a matter of time
A trend reversal is not in sight: Daniel Rempfler, expert for bond and currency markets at the asset manager Swiss Life Asset Management, says: “In the medium term we expect parity with the euro.”
This is also the assumption of Rudolf Minsch, chief economist at the Economie Suisse business association. “Sooner or later, franc parity will probably be reached, in particular because the inflation rates in the euro area and in Switzerland are very different.” The inflation rate in Switzerland has also risen. At around 1.5 percent, however, it is well below the level of five percent in the euro area.
From the point of view of economist Minsch, the franc parity is no longer a shock for the economy: “Companies can live with a continuous appreciation because they can adapt to the challenges.”
The assessment coincides with the voices from the export economy. It is said at ABB that the industrial group has been constantly striving for a long time to reduce the influence of the strong Swiss franc. The strong franc is a challenge for production in Switzerland in some business areas. However, thanks to measures such as the constant increase in productivity and efforts to innovate, it has been possible to noticeably limit the effects. The ABB Group recently invested 40 million francs in production in Switzerland.
The high-tech group VAT is reacting in a similar way to the currency risks: “We counter this pressure with efficiency increases in our business processes,” says Chief Financial Officer Chiozza. The group is also expanding production in all major markets, a natural hedge against currency fluctuations. In addition, VAT also hedges against currency fluctuations on the financial markets.
Only in the hotel industry is there concern about the strong franc: “As a location-based export industry, the Swiss hotel industry is particularly affected by the exchange rate development,” according to the Hotellerie Suisse association. The number of overnight stays by foreign guests depended heavily on exchange rates. However, the effect of the strong franc cannot yet be estimated.
From the point of view of economist Minsch, the Swiss export economy will even benefit in the long term from the strong Swiss franc. As a result, structures would have to be continuously adapted. Companies would therefore be forced to use innovations to bridge the cost disadvantages, to keep processes leaner and to achieve increases in efficiency in order to remain competitive.
healing effect
The franc shock of 2015 also proved to be healing: “This experience in crisis management helped many companies during the pandemic and is a major reason why the export economy has made ends meet relatively well in the last two years.” Already During the pandemic, the franc appreciated sharply because the currency is traditionally in demand as a “safe haven” among investors in times of crisis.
Because the companies are now adjusted to the strong franc, no intervention in the exchange rate is to be expected from the central bank SNB, says investment strategist Rempfler from Swiss Life Asset Management. “As long as inflation is an issue, the SNB is likely to hold off on major FX market interventions.”
The strong franc is dampening inflation in Switzerland, explains Minsch from Economie Suisse. “Imports are becoming cheaper and international purchasing power is increasing.” Swiss companies would therefore have to pay relatively less for oil, raw materials and finished products, for example. “This is currently an important reason why prices in Switzerland are rising less than in the euro area.”
The stable currency is helping the SNB to achieve its inflation target of between zero and two percent in the years to come. Therefore, according to Rempfler, the franc appreciation is also welcomed by the central bank.
The Swiss Life expert only expects the SNB to intervene in the foreign exchange market in the event of a significant deterioration in the global economy, which could trigger high international inflows into the safe haven of the Swiss franc. Low economic growth and a strong currency are the crisis scenario against which the SNB would fight with all its might.
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