The Swiss franc has strengthened in October. This rise is due to a decline in carry trades and growing risk aversion in Europe. The currency reached its highest level against the euro since May, trading at 0.91376 per euro at the end of last week, according to data from swissinfo.ch. This increase raises questions about how much further the Swiss National Bank (SNB) will allow the franc to rise.
Key Details
The carry trade involves borrowing in low-interest currencies like the franc to invest in higher-yielding assets. This strategy has lost appeal as returns have fallen. Year-to-date returns from selling the franc and buying the euro dropped to just 0.1% last week. This is down from 3.4% at the end of September. Asset managers have started to reduce their bearish positions on the franc, as noted by CFTC data. However, leveraged funds remain heavily net short. This could lead to more demand for the franc if risk aversion continues.
Background
Gregor Hirt, global chief investment officer for multi-asset at Allianz Global Investors, said, "If risk aversion persists, that residual position is a potential source of additional franc demand." The SNB has shown it is ready to intervene in currency markets if needed. Officials have expressed concern about the rapid rise of the franc. Shaun Osborne, chief foreign-exchange strategist at Scotiabank, expects the franc to reach 0.93 per euro by year-end. He noted that a break below 0.90 would be concerning for policymakers.
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The rise of the Swiss franc could affect export competitiveness for Swiss companies. It may also lead to changes in the currency markets. Investors will closely watch the SNB's actions and any possible interventions to stabilize the currency's value.
Watch for upcoming statements from the Swiss National Bank about its currency policy and any potential market interventions.
Based on reporting by: swissinfo.ch