— CYP 500 mln held in Swiss francs
Thousands of Cypriot borrowers who have taken out loans in Swiss francs should be anxious to see how much the Swiss National Bank (SNB) will raise interest rates on Thursday, since the decision is likely to have a profound impact on their loan repayments, but also on the value of the Swiss franc against the euro to which the Cyprus pound is tightly pegged.
The equivalent of some CYP 500 mln (860 mln euros) in loans by Cypriots in Swiss franc (CHF) will be affected by the SNB move on Thursday, when the Swiss Central Bank is widely expected to increase borrowing costs by 25 basis points to 1.75% from the present rate of 1.50%.
Some economists expect the SNB to be more aggressive and hike rates by 50 basis points, but this is a minority view.
Of the CYP 1.65 bln in foreign currency loans made by Cypriots, about 60% or the equivalent of CYP 990 mln (1,7 bln euros) are in euros, while 30% or the equivalent of CYP 500 mln are priced in Swiss franc. Loans in US dollars amount to the equivalent of CYP 100 mln (172 mln euros, USD 220 mln) while the biggest component of the remaining CYP 45 mln (77 mln euros) are loans in yen.
— Fantastic ride
The Central Bank of Cyprus recently issued a warning to the public to be cautious when borrowing in foreign currency in order to take advantage of lower interest rates prevailing in euros, Swiss franc and yen compared to Cyprus pound rates. But Cypriots who dared to borrow in Swiss franc and yen have until now made a double gain of lower interest rates and a weakening currency in which they have a loan, since both the CHF and the JPY have weakened against the euro and the Cyprus pound.
A year ago in September 2005 the CHF was 1.5540 against the euro. In April it weakened to 1.5820, then strengthened to 1.55 and now is back at 1.5800 area. According to the long term charts, if the 1.5830 level is broken, then it may well herald a further weakening of the CHF to levels close to and above 1.60.
This is not difficult if one considers that in 2000, the EUR was at 1.62 against the CHF, in 1999 it was at 1.65, while before the euro was born, its predecessor the Ecu used to hover at 1.6950 in 1998 and 1.7300 in 1996.
If this was to occur again, then all Cypriots who borrow or have already borrowed in CHF will benefit both from the lowest interest rate on their loans (hence lower repayments) as well as currency appreciation, since the majority have converted the proceeds of the loan into Cyprus pounds, which in January 2008 will cease to exist and will be replaced by the euro.
The prospects for the euro to rise against the Swiss franc will be boosted in early October when the ECB is widely expected to hike euro interest rates by at least 25 basis points.
The release of euro-zone CPI data on Friday will shed some light as to how the ECB will be moving in October and beyond. Economists expect E12 CPI to increase 0.1% month-on-month in August from a decline of 0.1% in July, while the year-on-year rate is seen at 2.3% from 2.4% previously.
— Speculative positions
The only risk from an immediate weakening of the CHF against the euro and other major currencies is the extremely short positions established by speculators around the globe, which confirms that it’s not only Cypriots who are seeking to take advantage of the currency’s low rate but many others as well.
Currency speculators trading in markets abroad have borrowed in cheap CHF and converted the proceeds into higher yielding euros, sterling, Australian and New Zealand dollars to take advantage of the rate difference.
Futures data has shown a net increase in CHF short positions worldwide, which may result in a reverse move for a while until the speculators are forced to close their positions. In such a case, there could be some buying interest in CHF.
