Strong franc hurts Swiss watchmakers

Major luxury brands are getting a big boost from a support package for the Chinese economy. However, a group of Swiss watchmakers are sounding the alarm. A very strong franc is making it increasingly difficult to compete with competitors from other countries.

It is not uncommon for a central bank to receive a call to lower the policy rate. Sometimes this call comes from government leaders, who could use the economic boost of a rate cut in the run-up to elections. It is rumored that President Lyndon Johnson in 1965 even angrily pushed then-Fed Chairman Bill Martin against a wall after the latter dared to raise the policy rate. However, it is usually economists who have a pronounced view on the course of central banks. But in mid-September, there was a striking call from Swiss watchmakers to the Swiss National Bank (SNB) to please lower the interest rate.

This makes a Rolex completely unaffordable
Behind the call are well-known brands such as Rolex and Patek Philippe, but also luxury conglomerates such as Swatch Group and Richemont. The sale of Swiss watches has decreased by 2.4% in the first seven months of 2024. According to the companies, this decline cannot be seen separately from the strength of the Swiss franc. In the past two years, the currency has risen by almost 20% against the dollar. Especially the sales to China - which keeps the renminbi fairly in line with the dollar - are under pressure with an export decline of 6%. Some watchmakers have even temporarily laid off part of their staff in an attempt to avoid layoffs.

SNB prevents record hunt
The challenges for luxury brands are certainly not unique. The export sector accounts for a whopping 55% of the Swiss economy. Due to the rise in the franc's value, it becomes very difficult for companies from the Alpine country to compete with competitors from countries with a relatively cheap currency. Admittedly, the SNB attempted to relieve some of the currency pressure last week. The central bank lowered the policy rate from 1.25% to 1%. Furthermore, the SNB hinted at another rate cut in December. The franc took a step back for a moment, but quickly crept back up. If the central bank had not intervened in the currency markets, the currency would undoubtedly have resumed its record hunt.

Bag of tricks will be opened
The SNB will likely have to open its bag of tricks in the coming months to keep the franc under control. The currency is in demand as a safe haven in uncertain financial times. Moreover, the Federal Reserve and the European Central Bank are on track to lower the policy rate faster than the SNB. These rate movements also push the franc further up. Sportswear brand On proves that it is indeed possible for a Swiss company to defy currency headwinds and be successful on the world stage. Revenue surged by nearly 30% in the second quarter. This is partly due to the involvement of (former) tennis phenomenon Roger Federer. Everything he touches turns to gold. It is to be hoped for the Swiss business community that he stays away from the franc.

Joost Derks

Joost Derks is a currency specialist at iBanFirst with over twenty years of experience in the foreign exchange market. This column reflects his personal opinion and is not intended as professional (investment) advice.

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