Swiss exporters cheer as more franc weakness on cards

ZURICH - 7 Aug 2017: Swiss exporters may carry on benefiting from a relatively weak Swiss franc for some time, with economic, monetary and technical factors all suggesting the currency's descent against the euro has further to run.

The franc has lost nearly 5 percent against the euro since the start of July and is trading near its weakest since the Swiss National Bank (SNB) abruptly scrapped a currency cap in January 2015.

The slide has been welcomed by companies whose profits suffered after the cap, set at 1.20 per euro, was scrapped and the local currency settled with gains of around 10 percent over the following weeks.

"This is very good news for our company and for all exporters," said Michael Merkle, chief executive of grinding machine maker Agathon.

"Let's hope it goes further and is sustainable. We have around 50 percent of our sales in euros, so it helps us a great deal."

Other companies including toilet maker Geberit (GEBN.S) and dental implant maker Straumann (STMN.S), which have much of their costs in Switzerland but a high proportion of sales in euros, should also benefit, Credit Suisse says.

On Monday, euro-franc EURCHF= was trading at 1.1472, down from 1.0942 at the start of July and the strong side of 1.07 in April.

Circumstantial data indicate the euro rally is not yet over.

The SNB has the some of the lowest interest rates in the world -- it aims to keep three-month rates between -0.25 and -1.25 percent and charges 0.75 percent on commercial banks' deposits -- and a commitment to currency interventions to prevent the franc's rise.

It is expected to keep that policy on hold, while expectations of tightening from other major central banks are gathering pace.

SNOWBALLING TRADES

Data on Monday showed the SNB's foreign currency reserves grew to 714.33 billion Swiss francs at the end of July, roughly a tenth bigger than the economy.

But the SNB, which declined to comment on its monetary policy, is thought not to be behind the franc's latest decline, as sight deposit levels -- a proxy for interventions -- have been flat in recent weeks.

Both the policy divergence with the euro zone and an improving economic and political situation in Europe have weakened the franc's allure.

"The G10 banks, including the ECB, are all shifting toward normalization while... the only central bank that is not going to tighten monetary policy any time soon and has the firepower to support an expansive policy is the SNB," said Peter Rosenstreich, head of strategy at online broker Swissquote.

Once the franc started weakening in July, it triggered a flood of activity by market players covering 'short' bets against the euro by buying the single currency, with automated trading amplifying the effect.

"The franc weakening snowballed very quickly," said Florian Weber, from J. Safra Sarasin. Once technical resistance at 1.12 francs to the euro was breached, the decline accelerated.

"We are in an area where no resistance can be identified," said Hans-Peter Reichhuber, an analyst at BayernLB. "The next hard resistance point would be 1.20, that is the most important level."

The SNB is expected to keep policy on hold at least until the European Central Bank cuts back on its own expansive policy and starts raising interest rates.

"The SNB may be happy that their current monetary policy approach now works much better, but they hardly have any incentive to change course in the near term," said Ulrich Leuchtmann, a strategist at Commerzbank.

"I wouldn't be surprised if they stick to the current policy stance until the end of 2018 and for the franc to even get a little weaker in the coming weeks."