'Francs' and beans: The G-10 currency set to sizzle

The Swiss franc is back on track to be the strongest performing G-10 currency against the dollar this year, beating all of its peers in October.

Investors including Amundi and J.P. Morgan Private Bank say its rally has scope to run and options recently showed the highest bets for franc appreciation since March, data compiled by Bloomberg show. Appetite for haven assets is strong as the war between Israel and Hamas heats up, while the Swiss National Bank continues to brandish franc purchases as a tool to curb inflation. 

“My mantra for a long time has been: don’t bet against the Swiss franc,” said Samuel Zief, the head of global foreign exchange strategy at J.P. Morgan Private Bank. “We have told clients who have Swiss exposure to stay long franc. For those who have concentrated euro or dollar exposures, the franc has been one of the currencies we’ve recommended being long to diversify that position.”

The franc was up 0.5% against both the dollar and the euro in October as of 8:41 p.m. in London after underperforming nearly every developed-market currency in September when the SNB surprised the market by pausing its interest-rate hikes. 

The franc’s safe haven status is underpinned by Switzerland’s large current account surplus as well as a net international investment position that’s among the strongest of any developed nation. Historically, it has had low inflation and takes a neutral stance in international affairs. 

The moves in the currency are the most-aligned with those of gold — a favorite hedge against geopolitical risk and inflation — since 2005, data compiled by Bloomberg show.

At the same time, the gains have taken the currency to its most-overvalued levels since 2015, making it the most expensive after the dollar, according to a Bank for International Settlements gauge. 

SPEED BUMP

While that overstretched level is a key speed bump that could slow the pace of the franc’s appreciation, it doesn’t seem to be stopping the advance for now. And while the currency has seen the biggest short bets built against it in two years as the rally has continued, any flareup in the Middle East, or central bank interventions, could see them unwound at pace.

“The franc is overvalued whichever way you look at it, but it would be wrong to underweight the currency in the current situation,” said Andreas Koenig, head of global currency management at Amundi, who shifted from underweight to neutral on the franc after Hamas’s Oct. 7 attack.

“Global escalation of the current conflict is not our base case, but if it happens, the franc is the cleanest and clearest choice to protect against these risks.”

He doesn’t rule out the currency strengthening to 0.92 against the euro if the conflict escalates, drawing in other nations. The franc traded weaker against the common currency for a fifth day on Tuesday, trading at 0.9628.

“All roads seem to be leading to franc outperformance,” said Paul Mackel, the head of global FX research at HSBC Bank Plc. The SNB’s staunch commitment to beat inflation and its explicit message about the preference for a strong currency is crucial, he said, predicting the currency will trade at 0.94 per euro by the end of next year. 

“The market is naturally going to be very reluctant to go against the central bank,” Mackel said. “I don’t see any great reasons why this currency should suddenly reverse course.”