Missing haven
At the start of the year, the Franc had performed well as a safehaven. As a result of political and economic developments in Japan, the Yen was not abiding by its usual safehaven form. Therefore, defensive plays within FX only had two credible places to go: the US Dollar or the Swiss Franc. As the US economy was at the epicentre of the conflict, the Dollar was also theoretically an imperfect defensive asset, albeit one that in reality did see significant defensive demand.
So, where has the Franc got to now? Risk conditions continue to rise and fall at extraordinary speed most often driven by developments in the Middle East. Yet, the Franc is almost nowhere to be seen. It is likely that the recent activities of the Swiss National Bank have undermined the monetary bedrock upon which the Franc’s status as a haven is built. This is undermining the currency’s ability to exhibit its usual safehaven qualities during episodes of risk.
Before and since its March 19th meeting, the topic of monetary easing back into negative territory has arisen. In fact, some sketchy reporting around the time of this decision even mis-quoted SNB officials as being in favour of negative rates in the near future, causing the Franc to whipsaw once the erroneous headline was corrected. In addition, FX intervention has been a hot topic with the rally in the Franc last year seen as a threat to economic growth. The central bank rate in Switzerland has been at zero since mid-last year. So far, the SNB has not entertained the concept of a return to negative-rate policy. However, the market is already implying some degree of cuts further undermining demand for the currency.
Discussion and Analysis by Charles Porter
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