By the standards of the Swiss Franc, crosses including EURCHF, GBPCHF, and USDCHF are moving alarmingly fast. The sell off the in Franc is not necessarily bad news for either the aggregate Swiss population nor the rest of the world. Alongside the push towards normalisation in real economies and markets alike, the still exorbitantly high prices of defensive assets stands to undermine signals of a durable and credible recovery. The Swiss Franc is one such defensive asset that investors hold onto to ride out troubling economic and financial conditions. With the EURCHF pair having soared to one year highs, it now faces considerable technical resistance levels. In order to demonstrate concrete confidence in the recovery, Swissy and other defensive assets should take out current support levels and continue their decline.
The weakening in the past few days in CHF has been violent. On Tuesday alone CHF gained in excess of one cent on its major crosses. This price move has prevailed against a backdrop of rising inflation expectations despite major central bank governors’ best efforts and further outperformance in the commodity space. As a defensive asset, the Franc usually sees investors hold short open positions against it during normal and good times. Throughout the pandemic, market participants particularly in the speculative space have held long positions with considerable open market interest. This market positioning appears to be increasingly unstable and in line with the gains already made this week could see a short squeeze.
The Franc also attracts one of the lowest interest rates in the G10 currency space with little sign of changing anytime soon. As the market opens up and risk appetite develops further, the Franc could also earn for itself the status as the go to funding currency to fulfil the market’s rediscovered appetite for the carry trade. This could put further downward pressure on CHF with a sell off towards 1.15 versus the Euro plausible by year end. It is the improving conditions globally with the vaccination trade and Draghi’s technocratic government in Italy that are providing the foundations for a weaker Franc in the present market. Any adverse shocks that disturb the more sanguine outlook than we have been used to in the past 12 months could upset this trajectory.
Discussion and Analysis by Charles Porter