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Analysts at MUFG Bank, point out the Swiss franc has recently started to strengthen alongside the price of gold. They argue the move is driven more by building concerns over higher inflation rather than safe-haven demand.

Key Quotes:

“The re-strengthening of the CHF in recent months has cast some doubt on expectations that it should continue to weaken as the global and European economies recover from the negative COVID shock. Our own year-end forecasts for EUR/CHF and USD/CHF have been set at 1.1250 and 0.9220 respectively. The recent rebound for the CHF has coincided with a rebound in the price of gold which has climbed from a low of USD1,667/ounze in March to USD1,876/ounze. The correlation between daily % changes in USD/CHF and the price of gold has re-strengthened to -0.38 over the past month but still remains well below levels at the end of last year when it reached a peak of -0.81 in November.”

“The rebound in both the CHF and gold appears to be driven more by building concerns over higher inflation rather than a pick-up in demand for safe havens.”

“Looking back over the last fifty years, it is clear that the CHF has been a better long-term store of value than the USD and EUR. The CHF has strengthened by almost over 200% against our equally-weighted basket of USD and EUR since 1975. The CHF outperformed in the run up to sustained periods of higher and rising US inflation back in the late 1970’s and late 1980’s. The CHF’s recent performance has been more mixed though. The CHF traded on a softer footing during the period of higher US inflation in the early 2000’s, although it was then followed by the CHF strengthening ahead of the next period of higher inflation between 2004 and 2006.”

“Further evidence of building inflationary pressure could provide a more supportive backdrop for the CHF. It poses upside risks to our forecast for the CHF to weaken modestly as the global economy continues to recover from the COVID shock.”

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