Historically, the Swiss franc has been treated as the world’s safe haven currency. However, through the past week, we have seen that this title didn’t translate very well into strength against the US dollar. While the swissie would gain as expected against many of its other notable counterparts (especially against the volatile high yield pairs), the US dollar found a unique sticking point through the recent credit crisis.
Swiss Franc’s Safe Haven Status May Once Again Favor USDCHF Short
Fundamental Outlook for Swiss Franc: Bullish
- The financial crisis finds refuge in the safe haven Swiss franc
- SNB holds rates steady, forecast shows the same mild, dovish slant as its European counterpart
Historically, the Swiss franc has been treated as the world’s safe haven currency. However, through the past week, we have seen that this title didn’t translate very well into strength against the US dollar. While the swissie would gain as expected against many of its other notable counterparts (especially against the volatile high yield pairs), the US dollar found a unique sticking point through the recent credit crisis. While the US banking system was the epicenter for the global rout, their was nonetheless an overwhelming demand or liquidity in short-term dollar-based assets (for liquidities sake). What’s more the flight from risk would have its carry implications, which actually works against the higher yielding franc.
Going forward, the Swissie’s safe haven status will likely put the market back into the single currency’s corner. Even if the market’s fears about financial stability be calmed next week, there will still be an air of caution. As a flare up in fear would almost certainly be centered on the US dollar, there will be a natural tendency for fundamental traders to steer clear of the greenback and look for a relatively safe alternative (enter the franc). Another point of dollar strength will come in the form of rate expectations. Though largely lost in the fray of massive liquidity injections and record breaking equity moves, the SNB did hold rates this past Thursday – despite a deterioration in economic activity and the clear difficulty in credit markets. In fact, the short statement that accompanied the statement seemed to assure the market that the policy authority would keep the benchmark stable for quite some time as inflation will ease back to target through 2009 as the economy naturally cools from its 2007 high (this stability standing in direct contrast to the wild speculation surrounding the Fed).
Looking for direction in the franc without the dollar’s bias in mind, the market will be taking note of the plan that backs up policy officials’ vow to restore liquidity and confidence to the market. The Swiss currency will certainly reflect whether or not traders are truly confident in the solution the fed and others come up with. If it is speculation as normal with these new policies in place, we will see the franc on the short-side of many a carry trade. Elsewhere, the calendar may have a modest influence on the currency (the franc’s own economic data hardly ever moves it). The KOF leading index will give a forecast for growth over the coming three to six months – an important reading as the markets will have to turn back to economic activity with the global cool down still in full-swing. – JK
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected].
