Trade Wars - What to expect from EurChf?

Being a small export-oriented economy, many are wondering whether a trade war would weaken or strengthen the Swiss Franc which has always been considered as a safe haven during global crises.

UBS Chief Investment Strategists concluded that the Swiss Franc (CHF) is likely to appreciate against the Euro (EUR), within limited ranges well defined by the Swiss National Bank (SNB). There are several considerations one need to look at before coming to a conclusion and these are highlighted below:

1) Swiss trade surplus with China

Although many market commentators are arguing that the Swiss economy would suffer if China enters into a trade war, this does not seem to be the case. To put things into perspective, last year Switzerland had only the equivalent of 1.6% of Swiss GDP (CHF 668bn) of trade surplus with China and therefore is not a figure one has to worry about.

2) Right place at the right time

If the trade war between United States (US) and China escalates, it is probable that other countries would benefit. Recently we have seen several meetings between the European Union (EU) and China in order to explore possibilities to avoid US tariffs. A small flexible country like Switzerland could profit from such a move. Of course a trade war might gradually lower global investment activity which would in turn affect smaller countries like Switzerland.

3) Safe haven asset

During global recessions, currencies like the CHF appreciate as global financial markets become risk-averse. The main drivers for this trend is when domestic companies would be returning funds to their home country due to investment opportunities falling and foreign exchange risk rising. A trade war would probably drive investors to risk-free assets and as such CHF would appreciate more.

4) SNB monetary policy

SNB's worry during a trade war is not necessarily about the franc’s value but more about exchange rate volatility.  If the franc weakens well beyond 1.20 per EUR, SNB is expected to consider monetary tightening. On the other hand, if EUR/CHF falls towards 1.12, it is expected they intervene again.

European economy is set to improve more as a result of good domestic demand and steady rise in employment over the recent years. The European Central Bank (ECB) has also been slowly tapering quantitative easing and hence all this should undervalue the Euro.

UBS strategists therefore forecast EUR/CHF to stand at 1.17 in three months, 1.20 in six months and 1.22 in one year. 




Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice.  No person should act upon any opinion and/or information in this document without first obtaining professional advice.


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