The Swiss Franc Quietly Returns To Early 2013 Levels

Includes: FEZ, FXF
by: Dr. Duru


The Swiss National Bank's hope for a continued weakening in the Swiss franc over time has gone unmet.

The Swiss franc has ever so slowly strengthened since dual rallies in early 2013 and is now stretching for the 1.20 floor.

The strength in the Swiss franc appears "quiet" because exports have remained relatively steady and the inflation picture has steadily improved over time.

In August, 2011, the Swiss National Bank (SNB) took a series of extreme measures to attempt to arrest an accelerating strengthening in the Swiss franc (NYSEARCA:FXF). These measures culminated in establishing a 1.20 floor against the euro (NYSEARCA:FXE) on September 6, 2011:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

The Swiss franc did continue to weaken for another two months until the market ever so slowly moved to test the SNB's resolve. From April to September, 2012, EUR/CHF hovered directly over 1.20 but the line never broke. During this time, the euro continued to sink against other major currencies amid increasing fears of an eventual collapse of the eurozone. The collapse never came, and the European Central Bank (ECB) even declared an end to tail risks against the euro. The euro carved out a sustained bottom that summer. Everything seemed in place for the Swiss franc to weaken, perhaps even back to pre-crisis levels. The franc never even got close to revving up a credible run of weakness.

In 2013, EUR/CHF delivered two small run-ups: the first maxed at 1.257 and the second maxed at 1.264. Ever since then, the franc has been a very "boring" currency as EUR/CHF has steadily drifted lower (franc strengthening). Over the last two weeks, the franc's strength has suddenly accelerated, for example, sending EUR/CHF to a 19-month low.

The Swiss franc has yet to mount a credible run of weakness against the euro since the immediate aftermath of the SNB's floor

The franc's strength has suddenly accelerated in the past two weeks


It is easy to assume and claim that this sudden bout of strength is "safe haven" buying as a response to the increasing tensions in the Ukraine. After all, the currency experienced a similar acceleration in strength in late February and early March as tensions in Ukraine built up to a Russian move into Crimea. However, the franc never went lower even as, arguably, conditions in Ukraine slowly worsened. Perhaps the franc is suddenly strengthening because of growing weakness in European stock markets as more economies in the eurozone slow down and even contract. The SPDR EURO STOXX 50 (NYSEARCA:FEZ) has tumbled 11% since hitting a post-recession peak in mid-June. The euro has also weakened against the U.S. dollar during this time and now sits at levels last seen in November, 2013.

This index of some of Europe's top stocks has gone from a post-recession peak to a negative year-to-date performance in less than two months


Whatever the reason, it seems a perfect storm may be building over the franc once again that just might test the SNB's resolve in coming weeks or months depending on how the potential catalysts listed above play out. Currency traders at least seem to lack any reason to "allow" the franc to depreciate in the near-term.

On August 13, 2014, Bloomberg ran a story on the franc's strength titled "Mighty Franc Poses Challenge for Made-in-Switzerland Label." The story contained several examples of Swiss companies losing profits and revenues due to the franc's strength. However, the article never mentioned the currency's impact on the economy as a whole. As it turns out, the franc's strength has not sent Switzerland's exports heading south. The chart below charts exports priced in millions of Swiss francs on the left axis versus the value of USD/CHF on the right axis.

Since at least 2007, Swiss exports have held steady within a wide range nearly independent from the value of the currency


No wonder the franc's creeping strength has been so "quiet"?

Even as the SNB has printed money at will to buy euros in defense of its 1.20 floor, Switzerland has experienced mainly disinflation. The SNB continues its optimism in looking forward to a rise in its inflation numbers.

Switzerland is only just now climbing out of a period of disinflation

Source: SNB Monetary policy assessment of 19 June 2014

Switzerland's GDP growth has yet to return to pre-recession levels. Yet, overall, the Swiss are enjoying a remarkable combination of conditions: ultra-low interest rates, a strong (almost impervious) currency, relatively stable export values, and no inflation.

The Swiss franc has been a relatively "boring" currency for a long time now. That stasis may soon change…

Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net long the Swiss franc