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August 11, 2017

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Plainly, just being safe doesn't cut it anymore ..... the Swissie revisits a famous level

April 18, 2018

 

ref :- "Swiss central bank dovishness weakens franc against the euro" , the Financial Times, Markets and Investing

Not to be over-critical, but the blandness of this FT headline masks a much more interesting backstory. The sight of EUR / CHF climbing to knock at the door of SwF 1.20 per Euro once again will be giving some currency traders the heebie-jeebies. Swiss exporters, a hugely important element of the Swiss economy, will be happy indeed at the currency's comparative weakness over the last three years but no doubt memories of the 1.20 level will be turning their gills a bit green too.

Back in January 2015, just after assuring everybody that they had no plans whatsoever to abandon their strategy to cap the value of the Swiss Franc by intervening in the markets to keep EUR / CHF above 1.20, the Swiss National Bank (SNB) did exactly that. The pressure exerted by those buying the Swissie eventually forced the SNB to throw in the towel, and immediately EUR / CHF crashed down through CHF 1.00 per Euro. Such were the market conditions that nobody is quite sure where the true low point was that day ..... let's just say that the Swissie appreciated by well over 20% in a blink of an eye.

That's a horror story for any highly-leveraged trader who believed that the SNB could defend their chosen level forever. If you were feeling uncharitable you might point out that assessing such risks was their job, and that there was no shortage of precedents of central banks being unable to withstand market pressure. You might have had more time for Swiss exporters horrified to see the cost of their exported products rocket in local currency terms, though they do not always elicit sympathy from everyone.

Since that time over three years ago, EUR / CHF  has been on a steady climb higher again. It hasn't been a straight-line move of course  --  nothing ever is --  and broadly speaking the occasions when the rate has fallen for a period have reflected spikes in general market volatility caused by sudden changes in macro-economic perceptions or surges geopolitical anxiety. The exaggerated reaction to US employment data in Febraury , and the resulting market fallout over anxiety about higher inflation and therefore sharply higher yields (as yet unfulfilled ) was a good case in point. In other words, as a rule the Swissie benefits (whether the SNB wants it or not) when there is demand for a "safe haven".

We talk often enough about the traditional safe havens these days : Government Bonds, Gold etc. Currencies tend to acquire that status if they are backed by a stable government and financial system, low inflation, current account surpluses and faith in the central bank. That means the Jap Yen and, the 2015 volta face by the SNB notwithstanding, the Swiss Franc. God knows that there is no shortage of crises, mostly geopolitical, cropping up on an almost daily basis right now so why is it, you may well ask, that the Swiss Franc has been weakening to the extent that it now threatens to break back up through the 1.20 barrier ? The barrier that the SNB tried in vain to keep it from falling through in the first place ?

One could argue that the answer to that is that having failed in one method to weaken the currency, the SNB is succeeding in another. An ultra-low interest rate policy (which of course means negative for a significant way along the yield curve) weakens the attraction of the currency and discourages capital inflows, whilst at the same time encouraging upward inflationary pressure  --  something the SNB would love to see. But Swiss monetary policy has been ultra-easy for a long time, why are we only now talking about interest rate differentials undermining the currency ?

That's because establishing a rate for EUR / CHF on the basis of interest rate differential relies not only upon SNB monetary policy but also what the ECB has in mind too ..... and whilst the SNB remains firmly wedded to its ultra-easy policies, the perception is that the ECB is moving towards policy "normalisation"  --  in other words, the interest differential is likely to widen. Mind you, some recent softer data from the Eurozone may come to undermine that argument somewhat but we'll cross that bridge when we come to it. For now, the "policy" differential is working firmly against the Swissie and is superseding its attraction as a recognized bolt-hole in any flight-to-quality.

It would only be fair to mention that the threat of Russian sanctions has also not helped the Swissie, in that they would hit Swiss companies pretty hard. Most are agreed however that policy divergence is the main driver behind the move. How bad would it have to be for safe-haven considerations to take precedence once more ? We probably won't know that unless and until the .... well, until things go really pear-shaped, geopolitically speaking. If we don't get any quick answers to that one, that'll be just fine, thank you ....

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