×

Swiss franc on track for biggest drop in six years and the devaluation has further to run, say analysts

  • The Swiss franc was on track for biggest losses in six years Friday after recording its fourth consecutive day of losses.
  • The franc fell to CHF1.13 against the euro.
  • The chief of the Swiss National Bank Jordan Thomas insists the country's currency remains "significantly overvalued."
A Swiss franc and euro banknotes
Dado Ruvic | Reuters
A Swiss franc and euro banknotes

The Swiss franc was on track for its biggest monthly drop in six years Friday after it recorded a fourth consecutive day of losses, prompting analysts to suggest that the appreciation of the "safe haven" currency may be losing steam.

The sudden drop came as a surprise to investors given the Swiss currency's reputation for relative stability, leading some to question the Swiss central bank's role in the currency shift.

At the start of this week in an interview with Le Temps, the Swiss National Bank's (SNB) chief Thomas Jordan said that the franc was still "significantly overvalued." This came after suggestions from the European Central Bank (ECB) that it may soon begin tapering its ultra-loose monetary policy saw the euro rally last week.

"Jordan's comments have set the tone for the franc move this week and I think the franc's weakness has certainly more room to run," Thomas Flury, head of currency strategy at UBS Wealth Management's chief investment office, said Friday, according to Reuters.

The franc fell sharply against the euro in morning deals, trading at 1.13 Swiss francs, a three percent drop on the week. Against the dollar, it hit a month low of 0.9724 Swiss francs.

The Swiss franc is closely linked to the euro and depends somewhat on the ECB when assessing its monetary policy. In January 2015, the SNB abandoned its policy of maintaining a floor in the euro/Swiss franc of 1.20, but Jordan told CNBC in June that the central bank would continue to intervene in foreign exchange markets where necessary to combat overvaluation of the franc.

"We follow exactly the situation in the foreign exchange market, we look at the pressure, and then we decide what to do in foreign exchange interventions," he said following an SNB policy decision in June.

When contacted by CNBC on Friday, the SNB refused to comment on the sharp dip or any intervention. However, analysts have suggested that Jordan's comments alone may have been enough to shift markets.

A Morgan Stanley note released Friday insists the franc remains the "most overvalued currency in the G10 universe," despite this week's fall.

The depreciation could relieve pressure on the SNB, which has been battling against currency appreciation during a volatile period for the euro.

"The SNB will be reassured that the depreciation has come at a time when it has pulled back from intervention," Kamal Sharma, G10 FX strategist at Bank of America Merrill Lynch, told CNBC over the phone.

Weekly Swiss site deposit data has waned as the geopolitical risks in Europe have faded and investors have returned to European equities, Sharma noted.

"This has allowed the SNB to pull back from its intervention strategy. (The franc) has done what we thought it would do following this policy shift."