'Overvalued' Swiss Franc seen as Prime Suspect in Slump of Swiss Watch Exports

Export figures show a sharp fall in one of Switzerland’s key exports: timepieces, and the strong Swiss Franc is taking a good portion of the blame. However, the post-Brexit UK market offers one spot of brightness for the industry.

Here is an example of why many countries dread having a stronger exchange rate.

The seemingly unassailable strength of the Swiss Franc was highlighted once again, when recent export data showed a -14.2% drop, year-on-year, in watch exports in July, according to official figures from the Federation of the Swiss Watch Industry.

The increasing strength of the Franc has made Swiss exports even more expensive, reducing their appeal to a global market.

“The reason why demand is being pushed lower is largely due to an overvalued Franc, which is unfortunate for manufacturers as we will not see any pick-up in demand as long as the currency remains so strong,” says Swissquote Bank’s Peter Rosenstreich.

The largest declines in Swiss Watch exports were to Hong Kong which fell by -32.7% - the 18th consecutive month of declines - and in Europe, especially France, which saw a fall of -27.8%.

The reduction in French sales was put down to the Paris terror attacks which impacted on tourism, especially from rich Asian travellers.

Declines were noted amongst all price brackets, but especially the high end, above 3000 francs, and very low end, below 200 francs.

Rosentreich noted that there was a silver lining in the Franc being so strong, which was the positive trade balance, “even though it declined to CHF 2.93 billion from CHF 3.55 billion.”

The analyst ended the article, arguing the fall in exports meant, “there will be increased calls for the Swiss National Bank to defend the CHF.”

Much like many other major central banks, however, the SNB appears to be, “running out of options,” and they have, “already exhausted many policy tools,” said the analyst.

Switzerland is already one of the few countries in the world which has negative interest rates, which currently stand at -0.75%; and have been negative since early 2015.

This is in an attempt to keep the Franc from rising.

After the UK voted to leave the EU in June the event caused a further increase in the Franc, and the probabilities of a rate cut from the SNB at their next meeting increased to 80%, according to Bloomberg. 

A further rate cut is therfore quite likely from the SNB who next meet on the 15th of September, given the poor trade figures for July.

The Federal Reserve is under increasing pressure to hike rates in America, but if it did, it would have a negative impact beyond its shores by strengthening the dollar and making emerging market debt - a high proportion of which is funded in dollars - relatively more expensive to service.

This could lead to a slowdown in emerging markets and a rise in global risk aversion, supporting flows into the safety-linked Franc.

As such, the global macro outlook looks even more positive for the Franc, but gloomier for Swiss exporters.

Of course, the strength of the currency can't take all the blame.

According to a report by Bloomberg in January competition from smartwatch’s such as the Apple Watch was also eroding Swiss market share.  

It is probably also the case that competition from fitness watches such as Garmin and Fitbit may also be impacting negatively on market share.

UK Sees Strong Demand for Swiss Watches, But How Long can it Last?

It is not all bad for the watch industry.

The Federation of the Swiss Watch Industry said watches worth £87m were exported to the UK last month, the best figures since November 2015.

The figures confirm a boost for luxury retailers following the EU referendum result, which has pushed down the value of the Pound and made British shops more attractive to foreign visitors.

However, we would warn that this could be a sweat-spot for the industry as existing stock can continue to be sold at existing prices.

Should these retailers have to import further stock we would imagine the devalued GBP would see them passing on price increases on the shop floor.