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Swiss Francs - what to do?

Monday 18 May 2015

Investors are now being charged a "penalty" interest rate of up to 0.75 % on their Swiss Franc bank deposits. Not all banks have taken this step, but more and more. Instead of earning interest on his money, the investor now has to pay interest. As a solution some banks are recommending to convert the Swiss Francs into another currency or to switch into another asset class like Swiss stocks.The question comes to my mind: Is this really good advice?


When it comes to cash, liquid bank accounts and term deposits, the old rule still applies: Never bet just on one currency. Unless you are a professional currency speculator. Like a globally active ship owner you should never have all your ships on one sea. There are times where the US Dollar is strong, then comes the EURO, followed by strength in the British Pound, the Aussie Dollar....it is all economics and political intervention. And who can predict that.

 

Nevertheless there is an exception: The Swiss Franc. Historically it has always been an exceptional currency. It has been a reliable currency in times of war, it has survived World War II, and it has been a long-term winner even against the good old strong Deutsch Mark from Germany. The strength has continued against the EURO until the Swiss National Bank tried to stop the Uptrend for three years at a rate of 1.20 Euro-CHF. It did not come as a surprise to experienced investors that this was not going to work. So in 2015 we are now at new highs of 1.04 Euro-CHF. The Swiss Franc is the long-term champion in currencies.

 

Considering the historic track record and especially the wind fall gain of 15 % against the Euro in 2015, it is the question whether a small " holding fee " of 0.75 % p.a. is really reason enough to exit the Swiss Franc. Of course paying interest on a deposit is terrible. But should one trade into a weaker currency just for that? On a deposit of CHF 100,000.- the penalty interest amounts to CHF 750.- per year. But on the other hand, a move in favor of the Swiss Francs of only 2 Euro cents results in a CHF 2,000.- currency gain.

 

Why not take a more generous view. As example: In my mind I consider the 0.75 % interest charge as a yearly

" Membership Fee " for a very exclusive club. Why should I leave this attractive club which has given me much joy in the past, now that they started charging a small fee? It may be worth staying. I would not change my currency mix. The Swiss Franc should be part of a solid currency hedge.

 

We cannot predict the future, but what do you think is going to happen, once the banks stop charging this interest fee? There will be a large money flow back into the Swiss Franc. It will be interesting to see which effect it will have on the currency rate. Until then I shall sit back relaxed and wait.