Swiss Franc Trading: History & Future

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Swiss Franc Trading: History & Future

It’s been snowing here in New York and has been a freezing adjustment for me after coming back from Miami, but I’m loving it! Today I’m going to respond to many of you who have been asking me about the future of the Swiss Franc after its jaw dropping moves on January 15th.

The Swiss franc has historically been considered a safe-haven currency with virtually zero inflation and a legal requirement that a minimum of 40% be backed by gold reserves. However, this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following a referendum.By March 2005, following a gold selling program, the Swiss National Bank held 1,290 tonnes of gold in reserves which equated to 20% of its assets.

A new referendum on November 2014 on the “Swiss Gold Initiative” which proposed a restoration of 20% gold backing for the Swiss Franc was voted down.

From 2011 to 2014, we saw important decisions made on the value on Mr. Swiss franc. What happened is that in March 2011 the USD/CHF dropped pass the 0.91 level because investors were looking for safety with the continuation of the Greek sovereign-debt crisis. By August 2011 the pair passed below 0.769 and that’s when the Swiss National bank decided to boost the Mr. franc’s liquidity to counter its humongus overvaluation.

Meanwhile in a different forex dance floor where Mr. Swissy was dancing against Ms. Euro, the pair appeared to be heading to parity, so the SNB had to get all serious and set a cap for the pairs movements. That meant that they won’t let the EUR/CHF pair dance below the exchange rate of 1.20.

In response to the announcement the franc fell against the euro, to 1.22 francs from 1.12 francs and lost 9% against the U.S. dollar within fifteen minutes. The intervention stunned currency traders since the franc had long been regarded as a safe haven.

Mr. franc fell 8.8% against Ms. euro, 9.5% against Ms. USA, and at least 8.2% against all 16 of the most active currencies on the day of the announcement. It was the largest plunge of the franc ever against the euro. The SNB had previously set an exchange rate target in 1978 against the Deutsche mark and maintained it, although at the cost of high inflation.

This cap went on until the historical Thursday on January 15th. 2015, when the Swiss National Bank suddenly got rid of the cap, and Mr. franc increased by 30% in value compared with the euro in just a few minutes. The distance they danced in those few minutes was more than they had moved collectively in the past 1000 days.

SNB Cap Removal Aftermath

-The key Swiss interest rate was lowered from minus 0.25% to minus 0.75%

–Investors would be paying an increased fee to keep their funds in a Swiss account

–Devaluation of the euro against the franc is expected to hurt Switzerland’s export industry

The Swatch Group, for example, saw its shares drop 15% (in Swiss franc terms) with the announcements so that the share price was approximately unchanged on that day in euro terms. UBS, downgraded its forecast for Swiss growth in 2015 from 1.8% to 0.5%.

– Many forex brokers faced troubles.

It is clear that the Swiss Franc shock is going to reshape the retail forex industry.
LeapRate has reported the most disastrous aftermaths which includes the bankruptcy of Alpari UK which led to their new partnership with KPMG.

FXCM is dealing with negative client equity balances of approximately $225 million, and as a result may be in breach of some regulatory capital requirements. Other brokers however such as IronFX Global Limited announced that was not affected by these events due to strong risk management systems and IG Group is looking to buy forex brokers that are struggling in the wake of yesterday’s heavy losses.

Why did SNB End the Peg?

1. Hot Swiss Political Topics

many Swiss are angry that the SNB has built up such large foreign-exchange reserves. Printing all those francs, they say, will eventually lead to hyperinflation. Those fears are probably unfounded: Swiss inflation is too low, not too high. But it is a hot political issue. In November there was a referendum which, had it passed, would have made it difficult for the SNB to increase its reserves.

2- European Central Bank’s Possible Quantitative Easing

the SNB risked irritating its critics even more, thanks to something that was expected the following week: many expect the European Central Bank to introduce “quantitative easing”. This entails the creation of money to buy the government debt of euro-zone countries. That will push down the value of the euro, which might have required the SNB to print lots more francs to maintain the cap.

3.Mr. Euro’s ongoing Depreciation

During 2014 the euro depreciated against other major currencies. As a result, the franc (being pegged to the euro) has depreciated too: in 2014 it lost about 12% of its value against the dollar and 10% against the rupee (though it appreciated against both currencies following the SNB’s decision). A cheaper franc boosts exports to America and India, which together make up about 20% of Swiss exports. The SNB argues, if the Swiss franc is not so overvalued, then it has no reason to continue trying to weaken it.

Future of Swiss Franc

Taking a look at the forex dance floor, Ms. USA has been strong enough to pull the USD/CHF pair back up to the 0.93 level above the Ichimoku cloud after the cap removal.

However with the Euro remaining in a weak position, the EUR/CHF pair hasn’t seen as much rebound.

In a long run, we could see the EUR/CHF pair to settle at one of the three key levels: 0.90, 1.00 and 1.10. The higher the rate, the better the forecast for Swiss economy, but still both the GDP and inflation would remain below their healthy level.

Based on these three technical levels there could be three different scenarios for the growth of the Swiss economy.

–Exports will suffer from a strong CHF

–Imports become cheaper on a strong CHF

–Lower EUR/USD rate would positively support building investments

-Strong CHF leads to substantial revisions of average inflation

-Imported goods have a weight of 27% in Consumer Price Index

-Energy prices already exert extreme deflationary pressure on price levels

Even though one of the reasons why the SNB ended the peg was the hot political topic in Switzerland where the Swiss scared of hyper inflation, Swiss inflation is actually too low, not too high. That’s why we might actually see a Swiss intervention to devaluate Mr. Franc again. A cheaper franc boosts exports to America and India, which together make up about 20% of Swiss exports. That’s all the important stuff you needed to know about Mr. Swissy on the forex dance floor.

Invest Diva

February 3, 2015