Fighting the rise of the Swissie
September 29th, 2011 Filed under: Investing Tips — Investing AuthorAfter an enormous appreciation of its currency over the past two years, the Swiss National Bank (SNB) took action in early August, slashing interest rates to zero to drive down the CHF. Since the intervention, both the USD/CHF and EUR/CHF both have had a sharp rise, returning to levels last seen in mid-July.
So what can a forex trader expect? The fact remains that, no matter what the SNB does, US and eurozone fundamentals haven’t improved, and it may be difficult to predict the Swiss Franc’s movements over the coming months.
Background – the Swiss economy
Switzerland is an export-driven economy, which means that the 20% appreciation of the CHF against the USD over the past year has had a negative impact on the country’s manufacturing and export sector. As Swiss goods now appear to be more expensive when converted into foreign currencies, demand has waned, with the country’s first-quarter GDP growth having fallen to 2.6% from 2.9% in the fourth quarter of 2010. The Purchasing Managers Index (PMI) revealed a contraction in manufacturing, having dropped from 59 in June to 53.5 in July.
So, although there has been a drop, it has not been a large one, which is largely due to the types of goods the country manufactures. As Switzerland is a producer of high-end goods, like watches, electronics and pharmaceuticals, they have larger margins than many countries that produce routine goods, which give it more pricing power.
However, because Switzerland hasn’t suffered much at this stage (especially in comparison to its eurozone neighbours), it is likely to be hit hard if the CHF returns to its upward trend, and GDP growth forecasts (currently around 2% for 2011 and 2012) will be lowered.
The rise of the CHF
The Swiss Franc has long been a safe-haven currency, attracting funds in times of economic uncertainty. The Swiss economy is known for its good fundamentals, with a sound fiscal and trade outlook, while, before August, the SNB had a reputation for not intervening in the currency.
With the US and the eurozone’s respective debt crises and recent stock market volatility, the CHF has climbed as a safe haven, along with the JPY and gold. The USD/CHF fell from 1.1700 in June 2010 to 0.7068 in early August 2011 (38%), and the EUR/CHF fell from 1.4500 in May 2010 to 1.0070 in early August (29%).
SNB intervention
In early August the SNB cut its 3-month LIBOR to zero-to-0.25% from zero-to-0.75%. Following the rate cut, Swiss officials talked the currency down and threatened a currency peg, a threat which was carried out in early September.
On September 6th, Swiss officials pegged the currency to the euro at a minimum exchange rate of CHF1.20, and said that they would enforce this rate by purchasing euros “in unlimited quantities”.
The question now is whether the SNB’s total assets of CHF270 billion (about USD303 billion at the time of writing) can fight the forex market, which accounts for over USD4 trillion of trades a day.
For more information, see Swiss FAQs.
Market reaction
In response to the SNB’s actions in August the USD/CHF and EUR/CHF had a dramatic bounce – the EUR/CHF hit a low of 1.0070 on August 10th and rose to 1.0915 by August 11th, and continued on to a high of 1.1973 (a total of 1903 pips) before the month ended. The USD/CHF hit 0.7068 on August 10th before rising to 0.7687 on the 11th, and an August high of 0.8233 at the end of the month (a total of 1165 pips).
The results following the currency peg were even more dramatic – the EUR/CHF hit 1.1016 late on September 5th and rose 1178 pips to 1.2194 on the 6th. Likewise, the USD/CHF hit a low of 0.7822 on September 6th and rose to 0.8575 following the announcement, a jump of 753 pips.
What to expect
The actions of the SNB are likely to have shaken the speculative and professional money out of the market. However, Switzerland has a population of just below 8 million, 2.5% of the 330 million population of the eurozone. If eurozone investors chose to put their money into a nearby safe haven, it would be difficult for the SNB to fight them.
So, if the European sovereign-debt crisis doesn’t get any worse, the SNB’s actions will probably stall further appreciation. If it does get worse, with Swiss interest rates close to zero and a peg established, there isn’t much left that the SNB can do. For the EUR/CHF to have bottomed out, the debt crisis needs to have bottomed out too.
Those who believe that the US is not going to suffer a double-dip recession and that Europe can come out of the crisis could go long on both the USD/CHF and EUR/CHF. However, with the Swiss currency peg set at CHF1.20 to the euro, if it drops below CHF1.10 again, it will be an indication of serious upheaval in the eurozone.
This article was written by Jacqueline Pretty – IG Markets. No representation or warranty is given as to the accuracy or completeness of the above information, consequently any person acting on it does so entirely at his or her own risk. IG Markets accepts no responsibility for any use that may be made of these comments and for any consequences that result.
