Euro's Outlook Improving as Swiss Franc Loses Strength

Investors are increasingly betting on a European economic revival, which is causing the Swiss franc to depreciate.
The outlook for the euro-area is looking more positive as energy prices decrease, China begins to reopen its economy, and the Federal Reserve appears to be slowing its rate hikes. This is causing a decrease in demand for safe-haven currencies such as the franc, which are typically used during times of market volatility.

‍
The euro-franc cross has seen a positive shift, pushing it past parity for the first time in half a year. This is a stark contrast to the situation in the previous year, when the franc was gaining strength against a weakened euro due to investors seeking refuge in one of the most sought-after currencies in the world amid inflation and recession worries.

‍
Kiran Kowshik, an FX strategist at Lombard Odier in Geneva, noted that the spread between German and Italian bond yields is decreasing rapidly, even though the European Central Bank has indicated that borrowing costs must increase significantly. This is a sign of how quickly global risk sentiment has recovered.
He commented that the current atmosphere does not support a pessimistic outlook on the euro-Swiss franc exchange rate in the short-term.

‍
The franc's decline to a rate lower than the euro has caused speculation that the Swiss National Bank may be more content with a weaker currency, as expectations of inflation reaching its peak in the export-driven economy increase. Despite its performance against the euro, the Swiss currency has also increased by around 8% against the dollar since the beginning of November.

‍
Chris Turner, head of FX strategy at ING Bank NV in London, commented that the Swiss National Bank (SNB) has been able to achieve a stronger Swiss franc, which has reduced the need for them to push the EUR/CHF exchange rate lower.
Wells Fargo strategists have predicted that the European Central Bank's terminal rate will be higher than the Swiss National Bank's by approximately 200 basis points in the current year. This shift in interest rates is in favor of the euro.

‍
Sven Schubert, senior investment strategist at Vontobel in Zurich, believes that if the European Central Bank (ECB) continues to take aggressive tightening measures, the pair could reach 1.05 in the near future. He also stated that if the market remains bullish and policy tightening continues without causing a recession, the rate could even climb up to 1.10.
Options pricing indicates that the euro is likely to increase in value against the franc, as risk reversals have reached their highest levels since February. This is due to an increase in the demand for protection against a potential appreciation of the euro.

‍
Strategists and portfolio managers generally agree that Switzerland's economic fundamentals, such as its deflationary pressures and investors' tendency to turn to francs when demand for riskier assets decreases, will likely keep the Swiss currency from depreciating too much in the long run.

‍
Martin Lenz, a senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, believes that if the euro zone outlook becomes more uncertain, the franc will strengthen when central banks indicate the need for stricter financial regulations.
The Swiss National Bank (SNB) may have accepted last week's move, however, if the rate were to go above 1.02, they would not be pleased.