The Swiss Franc has been a firm favourite of big money during times of uncertainty, as investors are drawn to Switzerland’s current account surplus. Couple this with the repatriation of foreign holdings by Swiss banks and you can see why the SNB had to put a floor underneath the EUR/CHF to prevent the Swissy getting any stronger.
Right now I feel the Swiss Franc (only over valued low yielding currency IMO) could be a worthy candidate as a short in my FX portfolio.
3 Reasons:
1 - It is a known phenomenon in the FX market that politically motivated volatility is often short lived. Investors become accepting of the political climate and soon feel the urge to move out of low yielding safe investments, and go in search of profits.
The turmoil in Ukraine and the issues in the Middle East are fast losing their political risk premiums. This may present an opportunity to sell low yielding currencies as demand for safe havens ease.
2 - As mentioned above, the repatriation of funds from foreign asset holdings has been a strong driver of CHF strength in recent years. Although it is premature to say banks are reversing these flows, it appears as if the balance sheet contraction has come to a halt. As a result there will be less demand for CHF.
Looking at the Swiss fund industry there is evidence of Swiss Asset Management Funds purchasing non- Swiss competitors. Such foreign business activity requires an outflow of local currency, which in this case is the CHF.
3 - Finally, the Swiss economy has seen inflation drop to -0.1% in the latest CPI report. Current levels will not require immediate action from the SNB. However, should prices fall further it will prompt the SNB to consider easing monetary policy. With rates at 0% analysts expect a form of quantitative easing rather negative rates.
I would not be surprised to see the SNB increase the 1.2000 floor that currently sits below the EUR/CHF exchange rate. A weaker currency will help with deflationary pressures.
The Charts
As always, the fundamental outlook has to be supported by price action, and in our case the Power Play software. So far so good! Our latest entry in USD/CHF at 0.9072 was just closed for profit at the 0.9154 key level. However, I do not believe this to be the end of the move. I will be on the look-out for another opportunity to get long when the software gives the signal.