Analyzing EUR/CHF Exchange Rate Drivers Across Different Economic Regimes

The Eur/chf exchange rate has experienced significant fluctuations over the past two decades, influenced by various economic factors and policy interventions. This article delves into the key drivers of the EUR/CHF exchange rate across distinct economic periods, identified through a robust statistical breakpoint analysis. We examine the periods before, during, and after the Swiss National Bank’s (SNB) minimum exchange rate policy (“peg period”), as well as the global financial crisis.

Identifying Key Breakpoints and Subperiods

We employed a statistical methodology to pinpoint breakpoints signifying shifts in the EUR/CHF exchange rate regime. This involved analyzing numerous regression models with different explanatory variables, focusing on periods with a minimum length of 20 months and a maximum of three breakpoints. The analysis revealed three significant breakpoints:

• December 2007: Marking the onset of the global financial crisis.
• September 2011: Coinciding with the start of the SNB’s minimum exchange rate policy.
• January 2015: Corresponding to the end of the SNB’s peg.

These breakpoints define four distinct subperiods for our analysis: pre-financial crisis (January 2000–November 2007), financial crisis until the peg (January 2008–August 2011), the peg period (October 2011–December 2014), and the post-peg period (February 2015–December 2020). We also analyzed the latent EUR/CHF exchange rate during the peg period, estimating its value in the absence of the SNB’s intervention.

Key Drivers of the EUR/CHF Exchange Rate per Subperiod

For each subperiod, a step-forward regression analysis was conducted to identify the most influential drivers of the EUR/CHF exchange rate.

Pre-Crisis Period

Before the financial crisis, the German stock index (DAX) and the CHFUSD1m interest rate differential were the primary drivers. A weaker DAX signaled a strengthening Swiss franc, reflecting its safe-haven status. A higher CHFUSD1m differential also led to Swiss franc appreciation. The explanatory power of these drivers was relatively low, with an adjusted R-squared of 3.9%.

Financial Crisis Period

During the financial crisis, the CHFUSD10y2y yield curve slope difference, the Swiss Market Index volatility (VSMI), and the DAX emerged as key drivers. An increase in the Swiss 10y2y spread relative to the USD indicated a stronger Swiss franc. Higher VSMI, reflecting market uncertainty, also strengthened the Swiss franc, reinforcing its safe-haven appeal. Interestingly, the DAX’s influence reversed compared to the pre-crisis period. The adjusted R-squared improved significantly to 20%.

Peg Period

Under the SNB’s minimum exchange rate policy, the CHFEUR1m interest rate differential was the sole significant driver. Higher Swiss interest rates led to a stronger franc, even though the SNB’s intervention limited the exchange rate’s movement. The explanatory power was very low (adjusted R-squared of 1.6%), highlighting the SNB’s dominant influence. Analysis of the latent exchange rate revealed the CHFEUR1m differential and the DAX as drivers, suggesting a dampened impact of interest rate differentials due to the peg.

Post-Peg Period

After the peg’s removal, foreign currency investments (FCI), the Swiss Market Index (SMI), and the CHFEUR30y interest rate differential were the most important drivers. Increased FCI weakened the Swiss franc, reflecting the SNB’s interventions. A higher SMI strengthened the franc, potentially due to increased portfolio demand. A higher CHFEUR30y differential led to franc appreciation. This period exhibited the highest explanatory power, with an adjusted R-squared of 23.6%.

Conclusion

The drivers of the EUR/CHF exchange rate vary significantly across different economic regimes. While interest rate differentials and equity markets consistently play a role, their influence can change in magnitude and even direction. The SNB’s policy interventions, particularly during the peg period, exert a substantial impact on the exchange rate dynamics. Understanding these shifting influences is crucial for navigating the complexities of the EUR/CHF market. Further research exploring the interplay of these drivers and the underlying economic mechanisms could enhance our understanding of exchange rate movements.