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Swiss Franc Torn Between Major Trends in Other Currencies

Swiss Franc Torn Between Major Trends in Other Currencies

2010-02-27 04:00:00
Ilya Spivak, Sr. Currency Strategist
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Taken against the US Dollar, the Franc is positioned to follow the Euro in a correction higher as details of a German-led bailout of the debt-ridden Greek economy begin to emerge. A plan for German state-owned bank KfW Group to buy up to 25 billion euros in Greek bonds to stave off a default should the troubled southern European country fail to set its own house in order is taking shape according to a story from Bloomberg News citing four anonymous lawmakers familiar with the matter. The near-term (20-day rolling) percent change correlation between USDCHF and EURUSD stands at -0.98, suggesting that any corrective upswing in the single currency will be mirrored in the Swiss unit. By extension, this very development may see a reversal of recent trends between the Continental European currencies at the expense of the Franc as EURCHF reverses some if its recent losses – a trend that had owed at least in part to Switzerland’s status as a relative safe haven because of its isolation from the structural problems within the Euro Zone.

The Franc looks well-positioned against the Yen, with a likely upward correction in risk appetite linked to Greek bailout prospects likely to boost carry trades and weigh on the low-yielding Japanese against the spectrum of other currencies. Indeed, the 20-day percent-change correlation between CHFJPY and the S&P 500 now shows an impressive reading of 0.82. That said, past experience would suggest that commodity bloc currencies will see outsized gains on any meaningful rebound in risk appetite, pointing to likely losses for low-yielding CHF against the Australian, Canadian and New Zealand Dollars.

Finally, the Franc looks likely to resume its march against the British Pound after a period of consolidation that has lasted since mid-October as negative sentiment toward sterling amid an increasingly dovish monetary policy outlook is compounded by expectations of a relatively strong Swiss GDP report for the three months through December, with the economy set to add 0.4 percent and thereby register the biggest expansion since the first quarter of 2008.

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