Bond Outlook January 24th

The CHF at 1.62 to the EUR! This is getting serious! We have already suggested that the CHF is losing or has lost its safe haven status. Some believe it might regain it if the Middle East blows up or some other world catastrophe happens. The Swiss run themselves extremely well: no political shocks, hardly any strikes, moderation in all things, including inflation, but are these features enough to justify interest rates permanently and significantly below those of the neighbouring countries. There is no more a French Franc or Lira to flee from. Is it likely that the need will come to flee from the EUR? If the answer is “no”, then the interest rate differential CHF to EUR has to disappear, or the CHF will weaken to the point of embarrassment and, worse still, to a source of inflation. The world is already firmly in an environment of rising interest rates. Our conclusion from the weakness of the CHF is that Swiss rates, far from being an exception, have some catching up to do. The process will stop when the CHF finds an equilibrium value against the EUR with interest rates of little or no differential.