Saddled with paying as much as 50 per cent of their salary to the Treasury, many UK hedge fund managers have thought out loud about forsaking Mayfair for Zug.
The UK authorities are quietly hoping that lifestyle considerations will trump financial ones. After all, they calculate, low-tax Switzerland’s picturesque views and pristine streets are no substitute for high-tax London’s buzzing variety. Faced with a choice of investing in either nation’s currency, however, “hedgies” might well elect to roll with the Swiss.
Some of the characteristics that make Switzerland a safe – if unexciting – place to live also make for a strong currency. The country’s authorities are legendarily prudent in their management of public finances, whereas the UK’s have often been profligate.
Switzerland sells much more to the rest of the world than it buys, while the opposite is true of the UK. And the mountain nation’s recent economic performance makes interest rate rises there much more likely than the barely-
Of course, much of this is already reflected in the sterling/Swiss franc exchange rate. Before the credit crisis struck in 2007, £1 bought around SFr2.50. In February, it commanded an all-time low of SFr1.43.
The strength of the Swiss franc – both against sterling and other currencies – is a concern for the Swiss authorities. An expensive currency makes life that much harder for the country’s exporters. According to textbook economics, £1 ought to buy SFr1.80.
Valuation has typically proved a poor guide to currency performance, however. And the pound has been even cheaper in relation to the Swiss franc in the past. At one stage in the mid-1990s, it was almost 40 per cent below where economics said it should have been.
My interpretation of the price chart suggests sterling could fall even further. I would not be surprised if it were to drop from SFr1.48 today to SFr1.34 and then SFr1.30.
A good opportunity to sell pounds and buy Swiss francs would occur if the exchange rate rallies to around its 55-week exponential moving average – currently around SFr1.5626 – and then reverses.
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