The Swiss Franc Has Much Further To Run. By Nicholas Hastings

If the Swiss franc really is the new Deutsche mark, then the Swiss currency could have a lot further to run, especially against the euro.

Of course, much depends on the confidence the Swiss National Bank has in the recovery of the economy and the ability of exporters to withstand further gains in the franc.

For the moment, the SNB appears fairly relaxed and happy to stand back from the market now that deflation fears have faded.

In fact, new inflation figures later Friday could show that the central bank has even less reason to intervene in the market now than it did before as a strong currency might be needed to fight growing price pressures. The year-on-year rise in the consumer price index is expected to be only 0.3%.

The upward trajectory of the Swiss currency has become even more pronounced in the last week or two as the Swiss economy has gone from strength to strength, showing that it is even more closely linked to the recovery in Germany than previously thought.


See how the euro has fallen agianst the franc in the last few weeks:




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Sure, the latest purchasing managers' index for Swiss manufacturers and KOF sentiment index have been a little disappointing, both looking ahead to the likely slowdown in growth that will hit most global economies in the third quarter.

However, second-quarter growth data Thursday showed that the Swiss economy expanded by a robust 3.4%, much more than the 2.6% increase that had been forecast and just behind Germany's 3.7% second-quarter expansion.

This, combined with a 4.8% rise in Swiss retail sales, suggests that the Swiss economy has proved much more resilient to the recent strength of the Swiss franc than anyone had expected.

Not only will this make the SNB less likely to intervene in the currency in the near future, it also confirms the Swiss franc's increased appeal to investors wanting to buy into the recovery in the euro zone but still keen to avoid the risks associated with the sovereign debt crisis that continues to hang over the euro.

In a new research piece calling the franc the "new mark," Mansoor Mohi-uddin, chief currency strategist with UBS in Singapore, lists not only the strength of the Swiss economy but the country's massive foreign reserves, its traditional safe-haven status as well as its close trade links with Germany, which take 20% of all Swiss exports, as all reasons to buy the franc.

Raghav Subbarao, a currency strategist with Barclays Capital in London, expects the franc to rise against the euro particularly because of a widening in the fiscal risk premium between the two currencies in recent months.

Back in May, when the sovereign debt crisis was at its peak, the Swiss franc was seen to be just as much at risk from a euro-zone default as the euro, given that Swiss banks are just as exposed to peripheral euro-zone debtors as euro-zone banks.

But now that bank stress tests have been conducted and key borrowers in the region have successfully returned to the market, the franc is no longer seen to be at risk from the debt crisis, while the euro is still seen as tarnished by the risks associated with the tough fiscal austerity packages that many of the debtor nations have had to adopt.

Subbarao said that this implies that the euro is overvalued against the franc and that there is a possibility of some further limited weakness in the near term.

Early Friday, the euro had ticked up to CHF1.2995 by 0645 GMT from CHF1.2985 late Thursday in New York, according to EBS, as global risk sentiment improved marginally.

For the most part, major currencies remain range bound as the investors wait for the latest U.S. non-farm payrolls later in the day to give some indication over just how badly the U.S. recovery is faltering.

The euro is hardly changed at $1.2824 from $1.2821 but the dollar did manage to climb to Y84.28 from Y84.21 as Asian stock markets posted small gains.

The euro was also able to rise to Y108.08 from Y107.96.