Giovanni Pagani talks to pickingalpha.com about current situation with Swiss franc, Swiss franc to Euro, Swiss franc to US dollar and potential consequences of Fed’s rate increase in today’s economy.
Looks like Swiss franc has come back to its usual range, today (March 18, 2015) its futures opening on CBOT was on the same level as January 6, 2015. Do you see Swiss franc coming out of the fall and its sideways moves. Do you see it going up or down? What events have triggered the come back?
Yes and no: yes, the Swiss franc has re-depreciated against USD after the release of the floor by the Swiss National Bank and no, if we look at the exchange rate with respect to Euro.
Let us start from Euro and Swiss franc. The exchange rate went from 1.20 where it was before floor releasedown to 1.05. There is a lot of discussion in Switzerland and probably abroad in regard to the topic of Swiss franc present and future, in terms of where it is going to move short and long term, the behavior of the Swiss National Bank as well as the economic impact in Switzerland. Swiss National Bank is probably still intervening into the market without public disclosure to support the Euro i.e. to avoid excessive appreciation of Swiss franc. The general feeling is that it is going to appreciate a bit more given what is going on in Europe – quantitative easing program implemented by ECB as well as also the situation in Greece, however the different economist, including the SNB are of the opinion that the Swiss franc is overvalued and should depreciate against the Euro once the European situation improves. As far as the US Dollar is concerned, the situation is different because in 2014 the depreciation of Swiss Franc against the US Dollar was simply driven by the Euro situation and the exchange rate floor, rather than direct link between the two currencies. After the release of the floor on January 15, 2015 when the exchange rate appreciate by some 20% in line with the EUR-USD, in the following weeks the USD-CHF exchange rate came back to a reasonable level.
In terms of impact of Swiss franc, the major commercial counterpart of Switzerland are not USA, but is Europe, therefore for the Swiss economy the most significant issue is what is happening with Swiss franc against the Euro. Still some of the imports, like oil, and exports to extra European countries are related to US Dollar and, therefore, also this currency plays a relevant role for Switzerland.
So, basically Switzerland and Europe will be affected by both Fed’s decision and slow down of Chinese economy as well?
The Swiss economy is very open and, therefore, is significantly affected by what happens to the foreign economies, in positive and negative ways. Europe, as larger market, has a smaller component of import and export. For both the development of the internal growth in Europe is going to have the biggest important. The Chinese slowdown, from a very high growth to still a significant positive growth is going to have some impact but probably not particularly large. For both, Switzerland and Europe, other internal issues and exchange rate will be more relevant.
As for the USA, the Fed interventions will come along with the growth in the country. This means that the measures to address the exceptional accommodative stance of the central bank since 2008, will be implemented in a period of the robust growth, which will help increase the export of European (and Swiss) goods to the US. This is also supported by the depreciated Euro.
So, globally, there are different moving elements that will add or detract growth to the European area, but the focus should be within the Euro zone.
Do you feel an approach of global slow down?
I would talk from a differentiated growth rather than a global slowdown. It is true that China is slowing down from a very high level and we have to get used to a reduced, but still high growth going forward: no country can grow at 8% level in the long term. At the same time, the US growth has proved to be sustained and quite robust. Europe is still in difficulty and looks very differentiated with the North driving the growth and the South lagging, except for Spain that is showing a good comeback. So, positive global growth with shifts across countries and regions.
Does it mean we have to look carefully at the situation in Greece and some other countries?
Greece is a small economy compared to overall European GDP. However, depending on how the Greek difficult situation will be handled with the European counterparties it might cause future problems with other countries because it would be an important precedent. Can a new elected government not honor past agreements within Europe? If Greece will be exiting Europe what is going to be next? What about their debt obligations? Will other bigger market with large debts come under pressure? The uncertainties on the stability and the future development of Europe will have a much larger impact than the specific difficulties in Greece.
NEWS after the interview – on March 18, 2015 USA central bank said higher interest rates in April are unlikely and generally promised to keep patience in regards to the interest rates increase. USA economy responded by the S&P hike of 1.2% right away.
Giovanni Pagani, Partner, Studio Fiduciario Pagani SA, graduated in Physics at the Federal Institute of Technology in Zurich (ETH) in 1992 and in Economics at the University of Lausanne (HEC) in 1995 with first class honours and prizes for best faculty examinations. Afterwards, he started his career at UBS in Zurich while still continuing the academic studies taking doctorate courses in finance. He embarked upon a career in the Merger and Acquisition team of the Investment Bank department and then moved to the Risk Management team for UBS group proprietary investments. Subsequently, Giovanni joined the Fixed Income team of UBS Asset Management as quantitative analyst where he was quickly promoted to Managing Director in 2003 and put in charge of quantitative research on a global scale.