In 2022, the best performing currency was the US Dollar, which outcompeted the whole of the market. This was largely due to the Federal Reserve consecutively increasing interest rates for 8 months and then again in July. The US Dollar was also supported by the currency’s safe haven status as the stock market crashed and most economists predicted a recession. The Swiss Franc was largely driven by its status as a safe haven and was the second-best performing currency.
In 2023, the best performing currencies are equally the Swiss Franc and the Pound. The Swiss Franc does not come as a surprise to most market participants. However, the UK in January 2023 was at the highest possibility of a recession compared to its partners. Therefore, why has the Pound outperformed the Euro, Yen and Canadian Dollar?
The Pound – “The Underdog”
The Pound rose in value against the US Dollar by 5.05% and rose by 2.12% against the Euro. From the major currency pairs categories, the Pound was the second best performing after the Swiss Franc. The main reason for the Pound increasing in value is the Bank of England’s monetary policy stance and the economy outperforming expectations.
The Bank of England’s base rate has risen to 5.25%, whereas the European Central Bank has increased interest rates to 4.5%. Therefore, the Bank of England is currently 75 basis points higher than its European partners. In addition, the BoE is currently predicted to be the least likely to cut interest rates in 2024. Economists are expecting both the Federal Reserve and the European Central Bank to cut interest rates in the first half of 2024. The Eurozone’s inflation is currently 2.9%, only 0.9% higher than their inflation target. Whereas the UK is still looking at inflation above 4.6%. Therefore, the UK is further away from its goal and has a higher need to hold its policy unchanged.
In addition to this, the UK economy has grown 1.3% so far this year, whereas economists were previously pricing in a recession. Due to the change in the economic outlook, investors are pricing the market differently and altering their portfolios. This week the Bank of England Deputy Governor advised that interest rates should remain tight for a “long time to ensure victory over the growth of inflation,”. The fact he does not see a reason to lower interest rates is comforting for investors within the Pound.
According to economists, currencies are now trading away from the Dollar which is supporting the Swiss Franc, Euro and the Pound. Investors and institutions increased their exposure to the Dollar in 2022, but now see a lesser need to do so. If the GBPUSD increases above 1.27320, the Pound will continue to obtain buy signals from technical analysis. If it fully corrects back to the average of the past 8 years, the exchange rate will continue to rise to 1.30000.
Swiss Franc – The Best-Performing Currency of 2023!
As previously mentioned, the Swiss Franc is the best performing currency of 2023. This is largely due to the market’s confidence in the central bank and the country’s economy. Switzerland has managed to bring inflation down from the recent high of 3.4% to 1.7%. Economists believe the country is at a lower risk of a recession and of inflation rising again. The Swiss Gross Domestic Product has risen for the fourth consecutive year; it was worth $807.71 billion in 2022 and is believed to have grown again in 2023.
In addition to this, the SNB is expected to drop interest rates at a lower pace compared to the ECB and the Federal Reserve. Lastly, with the Swiss Franc, investors have the benefits of a less dovish central bank and still investing in a safe haven asset.
The Swiss Franc has risen against all currencies and is performing best against the Japanese Yen. Against the Yen the CHF has risen 28% in 2022 and 2023. If the USDCHF declines below 0.87430, the exchange rate is likely to witness further signals that the Swiss Franc will continue to appreciate in the medium term.
Summary:
- The Swiss Franc is the best performing currency of 2023. This is largely due to the market’s confidence in the central bank and the country’s economy.
- Economists believe the country is at a lower risk of a recession and of inflation rising again. The Swiss Gross Domestic Product has risen for the fourth consecutive year.
- The Bank of England’s base rate has risen to 5.25%. However, the European Central Bank has increased interest rates to 4.5%.
- According to economists, currencies are now trading away from the Dollar which is supporting the Swiss Franc and Pound. Investors and institutions increased their exposure to the Dollar in 2022, but now see a lesser need to do so.
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Michalis Efthymiou
Market Analyst
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