The Swiss Franc (CHF) showed once again that it remains the de-facto fiat safe-haven currency in the world.

During the 2020 pandemic, the Swiss currency was the strongest on the FX dashboard, despite the Swiss National Bank (SNB) holding the policy rate at historic low levels – below zero.

Economic theory suggests that the strength of a currency is given by the strength of its economy. This is valid as long as central banks do not distort the perception by intervening in the market. For this reason, there is a gentlemen’s agreement among G10 nations that central banks do not target exchange rates. For this reason, whenever Draghi, the former ECB President, was asked about the strong Euro, the answer was that the central bank does not comment. The same does Lagarde, the current ECB President, but also the Fed and other central banks. With one exception – the Swiss National Bank.

What Will the SNB Do in 2021?

The Swiss economy was more resilient than other European economies or the United States. Although the number of COVID-19 infections rose in the second part of the year, the economic impact has been less severe than during the lockdown in the spring.

For this reason, household consumption should be key in the Swiss economic recovery in 2021. Of course, it all depends on how the pandemic evolves and the course of it. Under the most optimistic scenario, Switzerland should see no more lockdowns and improved economic performance, with the GDP forecast to reach pre-pandemic levels toward the end of 2021.

As for the CHF, a strong economic recovery will not be reflected in a strong currency. The reason for that is that the SNB constantly intervenes, and makes no secret that it spends tremendous resources to stop the CHF’s appreciation. This is one of the reasons why the U.S. Treasury has just designated the SNB as a currency manipulator.

In a way, the SNB’s problem looks like the ECB’s problem, at least when it comes to inflation. Low inflation and even lower inflation expectations require the two central banks to take extreme steps. Both central banks have the interest rate in negative territory while also accommodating the policy using other unconventional measures.

Yet, the strength of the CHF and the EUR hurts the inflation perspectives and the ability of the central banks to fulfill their mandate of price stability around the 2% target. Therefore, the ultra-accommodative monetary policy in Switzerland is here to stay, with inflation forecasted to reach only 0.4% in 2021.