An Alpine refuge from the Eurozone storms

FOR centuries, Switzerland has been perceived as one of the safest places to store your wealth. Not only does it have a long legacy of a discreet private banking system it has also been successful at keeping inflation under control, promoting economic growth and keeping its fiscal books in order.

Consequently, the Swiss franc does well in times of market stress. Traders tend to flood into safe havens such as the franc, the yen and the US dollar as they unwind riskier positions in commodity currencies and other assets. Indeed, the latest positioning data from the Commodity Futures Trading Commission shows that in the week to 30 November, there were almost twice as many non-commercial long Swiss franc positions than there were shorts.

It is unsurprising that the Swiss franc has remained a perceived safe haven currency. For a start, the Swiss franc is less tarnished than some of the other safe haven currencies. The dollar is under pressure from the latest round of quantitative easing while weak fundamentals and political instability hardly add to the yen’s appeal.

Secondly, Barclays Capital analysts Paul Robinson and Giulia Comotti say that the impression they get from investors is that they would like to buy the pre-euro Deutschmark, which no longer exists. “Many view the Swiss franc as the closest to it and the Swiss National Bank as the nearest equivalent to the Bundesbank,” they explain.

But while the Swiss franc has benefited recently from proxy Deutschmark characteristics through the Eurozone periphery crisis, some analysts are less than convinced about the Swissie’s safe haven status. “Switzerland is in practice probably more vulnerable to Eurozone credit problems than countries such as Norway,” says Adrian Schmidt at Lloyds TSB. This is both because of Switzerland’s greater dependence on exports to the Eurozone and because of its greater banking sector exposure relative to GDP.

These factors may partially help to explain why the Swiss franc rose less during the latest round of the debt crisis than it did back in April/May. It has only managed to gain 5.25 per cent against the single currency since the start of November compared to almost 9 per cent during the Greek crisis when it was also hampered by central bank intervention.

Whether traders should be buying or selling the Swiss franc is a tricky one. The Swissie is still extremely strong yet it is difficult to envisage an end to the Eurozone’s problems any time soon.

Barclays Capital’s Robinson and Comotti say that if the problems lead to significant further pressures on the global banking system, the Swiss economy may be vulnerable and the Swissie not the best option. “If the situation really does deteriorate further the US dollar and the Japanese yen appear the best G10 hedges. Small is not always beautiful.”

But if you are more optimistic about the situation in the Eurozone and anticipate a gradual stabilisation, then they recommend selling a basket of euro-Swissie and euro-Swedish krona.

Even if you think the Swissie’s safe haven status has been overblown recently, there’s no doubt it is still worthy of inclusion in any FX portfolio.