Sell safe-haven Swissie
AMID the firestorm that has engulfed the world economy over the past few months, one currency has stood out more than any other as a refuge from the heat and the volatility of the markets. The Swiss franc’s perceived status as a safe-haven – first from the Eurozone sovereign debt crisis and then from the potentially dire consequence of a double-dip recession in the US – has stood the currency in good stead ever since the Swiss National Bank said last month it would stop intervening in the FX markets.
In June it saw its biggest monthly gain against the single currency, breaching SFr1.31. And against the dollar, the Swiss franc has gained as much as 10 per cent since the start of June. Indeed, BNP Paribas’ Global Bias Indicator still shows the franc positioned as the strongest currency.
But although concerns about the Eurozone banking sector and the US recovery have not evaporated entirely, the Swiss franc is now looking slightly overbought and due a correction. BNP Paribas analysts recommend caution given the prolonged time that the franc has been at such a bullish extreme. And while RBS’s Ankita Dudani doesn’t rule out the possibility of further gains against the euro thanks to the franc’s reserve currency status, she says that the air gets thin below SFr1.28 unless the Eurozone’s problems escalate. What’s more, she adds that on a real trade-weighted basis, the Swiss franc is now anywhere from 2 per cent to 7 per cent above various long-run averages.
BNP Paribas recommends buying euro-Swiss franc with a target of SFr1.40 in the next two to three weeks. “Currently, the market is heavily short euro-Swiss franc at least as much as it is short euro-US dollar. As fears regarding the Eurozone banking system fade and Swiss assets become more expensive, we expect a short covering in euro-Swiss franc following the one in euro-dollar,” its strategists say.
“With more positive news on the European banking sector expected, the euro will rally against the Swiss franc. As euro-Swissie moves higher, pension funds will sell their expensive low-yielding Swiss assets for higher-yielding ones,” they add.
But while analysts envisage a correction in the Swiss franc over the next month or so, they agree that the franc will continue to outperform the single currency for two main reasons. First, Switzerland has a healthy fiscal position relative to its indebted Eurozone neighbours. Second, economic data remains resilient, with consumer demand positive and incomes rebounding sharply.
A short-term sell of the franc pending the results of the stress tests on Friday – which will determine future appetite for risk – could be a shrewd play this summer.