Swiss Franc Remains Tied to Trends Driving Other Currencies
The Franc has fared noticeably better than its major European counterparts since the beginning of the year. Indeed, benchmarked against the US Dollar, the Swiss unit has outperformed the Euro and the British Pound by nearly two percentage points on average. This had been achieved largely on the back of the troubles in the UK and the Euro Zone, the former struggling to catch up to the global economic recovery and burdened by a hefty fiscal shortfall while the latter is mired in speculation about sovereign default risks emerging out of its southern periphery. Given its relative isolation from these issues, Switzerland had become a sort of safe haven.
Last week’s developments both in the UK and the Euro area may encourage a correction of the Franc’s recent gains against their respective currencies. Fears of an imminent default in Greece are increasingly fading into the background after Athens announced another 4.8 billion euros in austerity measures while Germany (the natural leader of any bailout effort) threw their support behind the troubled nation’s efforts while “leaking” plans for a contingency plan to funnel 25-30 billion euros through western European state-owned banks should PM George Papandreou and company fail to get their own house in order. Meanwhile, the Bank of England did just about the only thing it could to contain further speculation about its dovish leanings: it kept both benchmark interest rates and the asset-buying program on hold and said absolutely nothing. On balance, it seems the time may have come for a bit of EURCHF and GBPCHF upside, at least in the near term.
Looking beyond Europe however, the Franc is likely to advance against the Japanese Yen as rumors of further easing from the Bank of Japan send 3-month borrowing costs lower and encourage a shift of FX carry portfolios toward a predominantly short-Yen bias, an outcome that should prove supportive for other funding currencies including the Swiss unit. This should also help strengthen the Franc against the commodity bloc as yield-seeking investors square their short-CHF positions against the risk-correlated currencies and swap them out for those funded in JPY. Finally, taken against the US Dollar, the forces driving the greenback are sure to hold sway. That said, given a fading correlation between USD and risk appetite as well as a mixed batch of economic news, the nature of the outcome is far from clear-cut. Indeed, the Dollar Index has been essentially flat for the past four weeks, and it remains to be seen what catalyst finally ignites some directional momentum.
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