Investors have long touted the Swiss Franc as a safe haven currency, and the historical record gives credence to that claim. Switzerland's stable political climate, solid fiscal policies, and resilient financial system make it a preferred choice during uncertain times. When global markets are shaky, demand for the Swiss franc often increases. As potential stagflation signs begin developing in the US, will the Swiss Franc replicate its success as a safe haven currency as it did in the 1970s stagflation environment? Let’s break down indicators to help us navigate a potentially tumultuous time.
While the term stagflation, coined in 1965 by British politician Iain Macleod, has fallen out of favor in the last few decades, understanding the underpinnings of the term will be beneficial in examining and understanding the value of safe haven currencies. Stagflation occurs when policymakers must deal with rising inflation, which reduces people's purchasing power, while those same economic conditions often lead to higher unemployment. This can lead to a cycle of central banks rapidly raising and lowering rates since the dual mandates (price stability and job creation) are at odds with each other. In this discordant environment, currencies like the Swiss franc can gain popularity as they are seen as stable investments.
Historically, the Swiss franc has proven its strength during downturns. For instance, during the 1970s, a period known for stagflation, the Swiss franc held its ground against many major currencies. In fact, it appreciated by about 170% against the U.S. dollar during this time, going from 4.3 Swiss Francs to USD in 1970 to 1.6 Swiss Francs to USD at the end of 1979 demonstrating its ability to provide security.
The Swiss franc typically experiences less volatility than many other currencies. This stability attracts investors looking to safeguard their wealth. There are several critical factors influencing how the Swiss franc performs in stagflation.
Switzerland has a well-run, stable economy. Specifically, Switzerland has historically maintained low levels of national debt and government deficits. Decades ago, Swiss voters passed a law requiring a clear fiscal path to a balanced budget anytime the government had a deficit. Further, a strong export sector helps sustain the Swiss economy. For instance, Switzerland reported a trade surplus of around 8% of GDP in 2022, supporting confidence in the Swiss franc. Switzerland also generally manages to shelter itself from high inflation, which can bolster the Swiss franc's value. The Swiss National Bank’s (SNB's) focus on maintaining low, stable prices groups Switzerland among the few countries with effective inflation management. Historically, the SNB also holds a large gold reserve relative to currency in circulation. Amid rising uncertainty, the demand for safe-haven currencies like the Swiss franc tends to spike. In situations where inflation and economic stagnation affect other economies, investors turn to the Swiss franc as a reliable alternative.
Investing in the Swiss franc during stagflation is worth consideration. The Swiss franc's past resilience suggests that it could offer stability during uncertain times. By investing directly through currency trades or indirectly through Swiss assets, diversifying into the Swiss franc may provide safety in fluctuating markets.