Absence Of CHF As Safe Haven Makes U.S. Dollar Ripe For Gains

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By Russell Glaser

Now that the SNB has set a floor for the EUR/CHF having promised, “To buy foreign currency in unlimited quantities,” traders will be forced to look outside the CHF for a new safe haven currency. Given that many of the currencies currently available in the market have a cloud hanging over their heads, this sets the stage for a potential USD rally.

Between the traditional safe haven currencies of the USD, CHF, and JPY, as of late all three have a dark cloud hanging over their heads with each suffering from their own particular faults though the most relevant may be government attempts to artificially weaken the currencies.

Following a 20 standard deviation move in the EUR/CHF when the SNB put a floor beneath the pair the CHF appears to be off limits temporarily. This policy will enable those looking to get out of the EUR a much better price versus the 1.10 level the EUR/CHF was trading at prior to the announcement. While the market may end up testing the resolve of the SNB to hold the 1.20 level the Swiss National Bank appears to have temporarily halted the appreciation of the CHF, thus limiting the upside for using the currency as a safe haven play.

The JPY is another traditional safe haven despite the country carrying a debt to GDP ratio of 1.2. The country is a net creditor and a majority of the Japanese debt is held by local financial institutions. The cloud hanging over the head of the JPY is the possibility the Japanese Ministry of Finance will intervene once again in the market to artificially weaken the JPY as it did in early August and in March. Japan will likely attempt to rally support for further coordinated intervention at the G7 meeting on Friday and Saturday.

The forex trading blogs have been overflowing with ideas for moving into the NOK as a safe haven play. This idea does have some talking points with the high cost of oil, a 10.5% budget surplus in 2010, and an AAA credit rating. The price action looks to confirm this theory as the EUR/NOK has breached its August low of 7.63. However, liquidity is sometimes a problem with the Scandinavian currencies; therefore, we turn to the most liquid currency, the USD.

Despite a struggling economy that continues to run out of gas every time the Fed’s quantitative easing programs end, an interest rate close to 0% and the Fed weighing even more measures to loosen monetary policy, investors who are seeking yield were previously inclined to search elsewhere. However, the USD does offer the most liquidity for real money investors with the US Treasury bond market being the largest bond market in the world. The USD, the most heavily traded currency in the 6.5 tn per day foreign exchange market, has ample liquidity.

For those investors that are concerned following the credit downgrade by S&P, the recent agreement between President Obama and Republicans to increase the US debt ceiling and to implement real budget reforms may be put the US on the path to fiscal austerity. Thus, when compared to the fiscal trouble the euro zone is experiencing, the USD may be well positioned to benefit from the European debt crisis. Given the recent price action that has the EUR/USD testing its June 2010 uptrend, the USD may be poised for further gains.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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