The Swiss franc is slumping on Tuesday as the central bank continues to intervene in foreign exchange markets and control the value of the currency. Despite being a conventional safe-haven asset for global investors, the francâs appeal might diminish as the nation potentially slips into a recession.
Last week, the Swiss National Bank (SNB) confirmed that it would escalate its foreign currency acquisitions to prevent the further rise in the franc. With the COVID-19 global pandemic decimating international financial markets, traders are seeking shelter in safer assets, which has appreciated the franc, the US dollar, and the Japanese yen.
The SNB has been gradually increasing its sight deposits over the last month. At the end of February, the central bankâs sight deposits rose about $5 billion. To kick off March, it advanced roughly $3 billion. Last week, sight deposits surged $6 billion, which was the biggest bump this year.
Overall, these were the biggest forex interventions since the Brexit referendum in 2016.
On Thursday, the SNB left interest rates unchanged at -0.75%.
Analysts fear that the francâs appreciation could skyrocket and hurt the national economy. The main concern is that if its boost is speculative rather than driven by fundamental values, then it could lead to a strong drop in domestic demand. With a recession on the horizon, this could be bad news.
According to a report by the BAK Economics Institute, Switzerland is headed toward a severe recession this year due to the economic fallout from the Wuhan Coronavirus. Private spending, a drop in tourism, and a decline in service exports could contribute to the economic slump. The Basel-based think tank believes that if the pandemic subsides, Switzerland could rebound immensely next year.
The group forecasts the gross domestic product (GDP) will shrink 2.5% this year, down from initial estimates of 1.3% growth. If the health crisis vanishes, GDP could spike 4.3% next year.
The USD/CHF currency pair tumbled 0.42% to 0.9807, from an opening of 0.9847, at 17:00 GMT on Tuesday. The EUR/CHF rose 0.22% to 1.0587, from an opening of 1.0563.
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