The Swiss franc is one of the markets’ primary carry currencies; but in a scenario where all benchmark lending rates are tumbling, the benefit of being a low yielder quickly vanishes. With markets taking a more rational tack towards their currency trading now that momentum has been curbed, the role of the Swissie may be redefined.
Even The Swiss Franc Has Been Dragged Lower By A Fading Rate Outlook
Fundamental Outlook for Swiss Franc: Bearish
- The SNB joins in a coordinated, European rate cut with a surprise 50bp benchmark reduction - High volatility and fading fundamentals keeps the threat of another flight to safety at hand
The Swiss franc is one of the markets’ primary carry currencies; but in a scenario where all benchmark lending rates are tumbling, the benefit of being a low yielder quickly vanishes. With markets taking a more rational tack towards their currency trading now that momentum has been curbed, the role of the Swissie may be redefined. Over the past three months, fear was guiding FX flows to any currency that has been assigned a traditional safe haven status at one point or another. This meant that capital was redirected to the secure boarders and low yield of Switzerland. However, fundamental traders now have time to fully consider their allocations. For Switzerland, the interest rate argument hardly holds water anymore. While there may be some carry interest from bygone years that still needs to be unwound, a benchmark lending rate of 2.00 percent is no longer a draw for funds seeking stability in low yield. Nowadays, Japan’s benchmark is 0.30 percent, the US is 1.00 percent, Canada yields 2.25 percent and even the UK rate has been lowered to 3.00 percent. And, with many of the G10 central banks cutting at 50 to 100 bps per meeting, the relatively deliberate SNB may eventually find itself among the high-yielders.
Another consideration for the franc as interest rates loose their pull over price action is the fact that Switzerland is relatively behind on the recession curve. Speculation surrounding how quickly an economy can resurface from its recession and the extent of damage done during the decline is playing a big role in long-term fundamental positioning. Considering Switzerland is now feeling the pinch of a Euro Zone contraction and therefore domestic consumption hasn’t yet fully faltered, the small independent nation may find it is hitting its worst gait when other economies are already recovering. With this in mind, local economic indicators may begin to have greater influence on price action. In the week ahead, two indicators promise to alter the fundamental landscape. The SECO Consumer Climate report will project domestic consumption trends – now the primary driver for economic expansion with foreign demand essentially dried up. Later in the week, the ZEW investment sentiment survey will gauge the level of risk in the Swiss markets – an important measurement with another crunch from the financial crisis a surprise away. – JK
Visit our recently updated USD/CHF Currency Room for more resources dedicated to the franc.
Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.