By Rani Chopra
The market has experienced unprecedented volatility and investors are getting more risk averse than ever before with equity fund outflows exceeding $61 billion since the start of May. The CBOE Market Volatility Index, (VIX) considered to be the markets fear indicator, continued to fall yesterday and is now down 12%.
Investors did not care whether they were invested in stocks, bonds, mutual funds or ETFs. Fear and uncertainty caused outflows across the board and gold became a safe haven, with gold prices rising over 24%.
In the midst of all the market turmoil, with the downgrade of the US debt and the continual downtrend of the US dollar, investors have turned to the Swiss Franc as a safe haven. The Swiss Franc is up more than 37% against the dollar compared to a year ago and has managed to rise against all major currencies amidst the fiscal problems of the Eurozone. The currency is also up 20% against the Euro from the start of the year.
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What’s not to like about the Swiss Franc?
Switzerland is one of the most progressive economies in the world with a current account surplus aided by a conservative monetary policy, a thriving economy, low inflation and low unemployment. With the looming sovereign debt crisis in Europe and the instability of the US stock market, the Swiss Franc has been the prime beneficiary besides the Yen. Due to its proximity to the Eurozone, the Franc gains every time there are speculations on the strength and stability of the Euro.
The appreciation of the Swiss Franc is impacting Swiss exports and there are talks that the Swiss government will peg the Franc to the Euro. This was already reflected in the trading sessions over the last few days, as investors proceeded cautiously in the event that the SNB may follow through on its threat. Concerns of an overvalued franc and its effect on exports and consumer spending have left the SNB (Swiss National Bank) with no choice but to ease its monetary policy.
Several analysts believe that pegging the Franc will be a bad move and may not deter investors from buying the Franc when faced with volatility in the US stock markets and the Eurozone. Previous interventions by the SNB have not been very successful, yet once again last week, the Central Bank intervened and injected liquidity in the economy. The Franc temporarily depreciated against the Euro, but crisis in Europe once again saw investors taking refuge in the Franc.
Pegging the currency is not as simple as some might think. It will require constant buying or selling of the currency in the FX markets in order to maintain stability and if there are balance sheet concerns then this move needs to be considered seriously. With the ECB already bailing out Italy and Spain, adding Switzerland to the mix may not be all that intuitive.
For investors looking to have exposure to the Swiss Franc, a good play is the CurrencyShares Swiss Franc Trust (FXF). Though the ETF suffered with news of the potential pegging of the Franc and the injected liquidity by the SNB and was down more than 5% since last week, the potential for upside is tremendous.
The technical indicators for the ETF are bullish and now is a good time to buy on the dip for investors who want to gain exposure to the currency. Investors need a safe place to park their money and other than gold, the Swiss Franc seems to be the second best alternative compared to the dollar and the Euro.
SmartStop users received an exit trigger on Aug 11 when the Swiss Franc fell as rumors spread about the Euro-Swiss Franc peg. The Franc fell against the dollar and the Euro and continues this downward trend. Investors who exited their position on receiving the trigger potentially saved over $7.50 per share. In the current volatile scenario, this ETF has a risk profile of “above normal”.
However, this is a good time to watch this ETF closely as it promises to bounce back in light of the SNB meeting on Wednesday. The Franc is still the strongest currency with the smallest risks and as long as the debt problems in Europe continue, the Franc remains the safest choice.