Switzerland's economic fundamentals look stellar, especially when compared with its struggling Eurozone neighbours, and there are many reasons to be bullish about CHF, except for one – the Swiss National Bank isn't interested in a very strong currency.
It was a good week for the Swiss franc and not unsurprisingly so given GDP rose 0.6% in Q1, 1.1% on the year, beating analysts' expectations for 0.2% and 0.3% in the previous quarter. Also, the country's current account surplus has been slipping into double digits.
However, the really bullish fundamental for CHF is the real estate boom taking place in Switzerland. These are nearly always positive drivers for currencies as the markets anticipate interest rate hikes as the central bank will seek to quell inflationary pressures.
But before rushing to invest long-term in CHF it is worth recalling the events of September 2011 when CHF plunged around 10% in one day following extreme monetary and verbal intervention from the Swiss National Bank. It is also worth recalling that Switzerland's robust economic performance is partly down to that devaluation, which the authorities won't want to endanger through a soaring currency.
CHF rally comes with a wealth warning
Though CHF does have some upside potential, it would be foolish to expect a long bull run versus EUR and USD. Exports are a key focus for Switzerland and the SNB is likely to intervene again, verbally at first, if there are signs that country is becoming uncompetitive in global markets.
Rather than raising interest rates, the SNB is looking to use macro-prudential tools such as forcing banks to hold more capital against mortgages to reduce the supply of funding to the real estate market. Though such measures can be effective, higher interest rates are often the best medicine to cool a run-away real estate market.
The issue of a strong currency will become all the more pressing if the global economy doesn't pick-up momentum as other countries will focus on currency wars to gain market share with Switzerland among the winners so far.
However, a very likely return of the Eurozone crisis will send more capital rushing for the safety of Switzerland and would also put upward pressure on CHF. All these factors suggest that the SNB could face some tough decisions in its bid to keep the national currency on a leash.
Switzerland as a country definitely remains a safe haven thanks to its enviable record of political and economic stability. The same cannot be said for its currency.