Swiss Franc Regaining Safe Haven Status as Dollar Loses Favor

USD/CHF

The Swiss Franc has started to regain its status as a safe haven currency which has sent the USD/CHF to its lowest levels since January 19th. Indeed, we have seen the pair’s negative correlation with risk appetite shrink from 40% to 10% as it has traded in line with equity markets. However, today’s dollar strength on a flight to safety shows that the greenback is still favored at extreme levels of pessimism. Signs that the global economy is faltering should favor the reserve currency, but if broader markets prove to have the ability to decouple from a weak U.S. economy then the pair could regain its traditional positive correlation with risk.

USD/CHF’s Correlation with Risk Reversing

SNB Interest Rate Expectations

Overnight index swaps are only pricing in 8 bps of tightening from the Swiss National Bank over the next twelve months down from 51 bps on April 23rd. The central bank traditionally keeps rates low in order to suppress Franc valuation in order to spur demand for exports. Therefore, yield expectations typically have little impact on price action for the USD/CHF. However, the SNB is willing to intervene in currency markets by selling the local unit, which can’t be ruled out at current valuations. Surprisingly, the monetary authority has been selling previous purchased Euros, which could be a sign that they have waved the proverbial white flag on intervention. Discuss this and trading ideas join the USD/CHF forum.

FOMC Interest Rate Expectations

An unexpected contraction in manufacturing in the Philadelphia area combined with initial jobless claims rising above the half million mark has sparked fears that the U.S. economy is headed for a double dip recession. Policy makers are now expected to add stimulus measures, rather start to remove them, before the end of the year -as expected when 2010 began. Indeed, we can see that Fed Fund futures are now giving a zero percent chance of rate hike by the end of the year. Forecasts for a 3.0% rise in U.S. durable goods orders could ease double dip fears but may not alter yield expectations, but a lower revision in 2Q GDP could add to the dovish outlook.

Risk

Stocks started the day on the wrong foot as concerns over the potential for a double dip recession weighed. However, they staged a small comeback as bargain hunters jumped in and signaled that investors aren’t ready to push the panic button yet. Tech names took the biggest hit which is a sign that analyst are lowering their expectations for business and consumer spending. The 50.0% Fibo of 9614-10,719 held as support at 10,167 but downside potential remains to the 61.8% Fibo at 10,036. Discuss this and other fundamental data in the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com