Just like its Japanese and US counterparts, the Swiss franc is reaping the benefits of its safe haven status. Known as a perennial funding currency and a timeless harbor for capital, the currency will continue to benefit from flight to safety flows. However, with investors growing increasingly suspicious of the sanctity of any asset, the franc may come under greater pressure.
Swiss Franc Just As Linked To Risk Appetite As The Dollar And Yen
Fundamental Outlook for Swiss Franc: Bullish
- SNB joins the crowd and cuts its benchmark lending rate by 25 basis points to 2.50 percent. - Panic further engrains itself into the psyche of the markets and gives the Swissie additional fuel
Just like its Japanese and US counterparts, the Swiss franc is reaping the benefits of its safe haven status. Known as a perennial funding currency and a timeless harbor for capital, the currency will continue to benefit from flight to safety flows. However, with investors growing increasingly suspicious of the sanctity of any asset, the franc may come under greater pressure. Economically, Switzerland is inextricably linked to the health of the Euro Zone. In good times, this aggregate economy is seen as an ever-present trade partner; but in today’s fear-riddled markets, the bureaucracy preventing the Union from enacting a sweeping bailout plan threatens to infect Switzerland just as surely as the US cold spread to Europe.
Another consideration is the fact that the franc is no longer an optimal funding currency. With an average 2.50 percent benchmark Swiss lending rate, the Japanese 0.50 percent and US 1.50 percent primary rates represent lower risk (hence the franc’s drop against both of these counterparts). However, considering the massive unwinding that has already taken place, it is growing less and less likely that investors still have large amounts of capital still tied up in these very modest carry pairs (CHFJPY and USDCHF). Realistically, these specific moves are being driven by aggressive dollar and yen buying, and when these trends are curbed the Swissie will be able to rebound against the dollar (though the same conditions will likely see the currency dropping nearly everywhere else).
In the week ahead, beyond the blurry influence of risk appetite/aversion, the franc will track the efforts of the top global powers’ policy decisions. This weekend’s G7 meeting will be pivotal for confidence and in turn the franc. Pessimism is so deeply entrenched in the markets that it is difficult to say what actions could reestablish confidence in lending and investing; but the plan will need to address the frozen credit markets. The market is fully aware that there has been far too much leverage built up through credit through the years, and there will always be a high level of risk as long as there are multiples of derivative capital built up on a fixed amount of hard assets. A long-term solution will need to secure an orderly deleveraging while simultaneously insuring that investment is still strong in other areas. Sweeping efforts must be made on this account. So far, the UK and US plans to draw bad debt from their respective financial systems is a good step. Even better will be the New York Fed bringing its planned credit default swap clearing house to fruition and the global effort to secure all interbank lending and national bank deposits. - JK
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Written by: John Kicklighter, Currency Strategist for DailyFX.com Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.