The forgotten currency

Historically, dollar/Swiss (USD/CHF) was sought out as a safe place to dump assets during times of war, international turmoil, or inflation uncertainty. However, this role appears to have diminished. During the emerging markets sell-off that hit global markets in May, “the Swiss franc seemed to lose its safe-haven bid,” says David Powell, currency analyst at Ideaglobal.

“Many have said that relationship no longer holds.”

A weekly chart of the dollar/Swiss, shows an almost identical (though inverse) picture of weekly action of the euro/dollar.

The dollar/Swiss sold off from March through May, tumbling from $1.32 to $1.19, but has been consolidating within a rising channel.

Short-term resistance is apparent at the mid October peak at $1.27 and support at the late September low at $1.22.

Dollar/Swiss and euro/dollar generally trade inversely because the Eurozone and Swiss economies are closely correlated. When forex traders want to zero in on the Swiss economy and currency, they favor the euro/Swiss rate (EUR/CHF), which was trading around 1.59 in mid-November. Throughout 2006, euro/Swiss strengthened as the euro gained vs. the Swiss franc.

Interest-rate differentials clearly favored the euro for much of 2006, with the ECB rate currently at 3.25 percent and the Swiss National Bank’s (SNB) key interest rate at 1.75 percent. While growth differentials favored the Swiss franc in 2006, forex players focus more on the interest-rate comparison. The latest GDP data comparison reveals a second quarter 3.2-percent year-over-year gain for Switzerland vs. a 2.7-percent reading for the Eurozone.

A major factor depressing EUR/CHF has been the popularity of hedge funds and other major global players utilizing the franc as a financing currency.

“Switzerland has the second-lowest interest rate in the G 10 after Japan,” Powell notes. “The last Commitment of Traders data revealed the short position in Swiss franc [futures] had actually surpassed that of the yen.”

Hedge funds and other large players have been actively shorting the Swiss franc and buying higher yielding currencies to profit on the carry (or positive interest-rate differential gained).

Although both the ECB and the SNB are expected to hike rates at their December meetings, the pace of ECB tightening is still perceived as faster, which should continue to support euro/Swiss strength into early 2007. The SNB meets next on Dec. 14 and market players widely expect a 25-basis-point hike.

Ideaglobal targets euro/Swiss gains to 1.60 at year end and 1.62 by the end of the first quarter. Dollar/Swiss is seen at $1.2550 by year-end and $1.2440 by the end of the first quarter.