EUR CHF Exchange Rate Drivers: A Subperiod Analysis
The Eur Chf exchange rate has experienced significant fluctuations over the past two decades. This article analyzes the key drivers of these fluctuations across distinct subperiods: pre-financial crisis, financial crisis, the Swiss National Bank’s (SNB) minimum exchange rate policy period (the “peg” period), and the post-peg period. We employ a statistical approach to identify breakpoints separating these periods and then utilize a step-forward regression model to pinpoint the most influential drivers within each subperiod.
Identifying Breakpoints and Subperiods
We identified three key breakpoints: December 2007 (onset of the global financial crisis), September 2011 (start of the SNB’s minimum exchange rate policy), and January 2015 (end of the peg). These breakpoints delineate four distinct subperiods:
- Pre-crisis: January 2000 – November 2007
- Financial Crisis: January 2008 – August 2011
- Peg Period: October 2011 – December 2014
- Post-Peg: February 2015 – December 2020
Key Drivers of the EUR CHF Exchange Rate by Subperiod
Pre-Crisis Period
During the pre-crisis period, the German stock index (DAX) and the CHF/USD 1-month interest rate differential were the primary drivers. A decline in the DAX, reflecting a decrease in risk appetite, led to a strengthening of the CHF, highlighting its safe-haven status. Similarly, an increase in the CHF/USD 1-month interest rate differential, indicating higher relative interest rates in Switzerland, also strengthened the CHF.
Financial Crisis Period
The period encompassing the financial crisis saw the CHF/USD 10-year/2-year yield curve slope difference, the Swiss Market Index Volatility (VSMI), and the DAX as key drivers. An increase in the Swiss yield curve slope relative to the USD, suggesting better relative economic prospects for Switzerland, strengthened the CHF. The VSMI, acting as a crisis indicator, also demonstrated the safe-haven characteristic of the CHF: higher volatility led to CHF appreciation. Interestingly, the DAX’s influence reversed compared to the pre-crisis period, with declines in the DAX now weakening the CHF.
Peg Period
Under the SNB’s minimum exchange rate policy, the CHF/EUR 1-month interest rate differential was the sole significant driver. Higher Swiss interest rates relative to the Eurozone put upward pressure on the EUR/CHF, although the SNB’s intervention limited its impact. The observed exchange rate’s limited variability during this period resulted in a low explanatory power for the model. Analyzing the latent exchange rate (estimated exchange rate without the peg) revealed the CHF/EUR 1-month interest rate differential and the DAX as drivers, with interpretations similar to previous periods.
Post-Peg Period
The post-peg period exhibited the most significant drivers. Foreign currency investments (FCI) by the SNB played a crucial role, with increased investments leading to CHF depreciation. Additionally, the Swiss Market Index (SMI) and the CHF/EUR 30-year interest rate differential significantly impacted the EUR/CHF. Increases in the SMI strengthened the CHF, potentially due to increased portfolio investment demand. As expected, a wider CHF/EUR long-term interest rate differential favored CHF appreciation.
Conclusion
This analysis reveals the evolving nature of EUR CHF exchange rate drivers across different economic regimes. The influence of safe-haven effects, interest rate differentials, equity markets, and SNB interventions varied significantly across the examined subperiods. Understanding these dynamic relationships is crucial for interpreting past exchange rate movements and for forecasting future EUR CHF fluctuations. The identified drivers and their changing significance underscore the complexity of the EUR CHF exchange rate dynamics and the need for ongoing analysis in this ever-evolving market.