The Swiss Franc Hasn't Been So 'Safe' Lately

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Summary

The Swiss National Bank continues a policy of foreign currency buying in order to weaken the Swiss Franc.

Therefore, the Swiss Franc has not been as much of a "safe haven" in the light of Brexit as other assets such as gold.

In this regard, I take a bearish view on the currency and expect further depreciation ahead.

In my previous article, "Why The Swiss Franc Will Swing Like A Pendulum", I made the argument that the Swiss franc is not playing as central a role as a safe haven vehicle as other assets such as gold, the yen, etc.

The Brexit event last month has all but confirmed this. For instance, I had previously written that the kiwi dollar is expected to be a strong currency going forward due to strong economic fundamentals from New Zealand. Interestingly, when we compare the USD/CHF and NZD/CHF, we see that since Brexit the US dollar has actually gained significantly against the franc, while the kiwi dollar has shown continuous, steady appreciation against the franc for most of 2016.

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In this regard, has the market misjudged risk appetite, or is the franc genuinely losing favor as a safe haven currency? Ever since the "Swiss surprise" of January 2015 when the Swiss National Bank depegged the franc from the euro, the environment for the Swiss franc has been fundamentally different. In an effort to bolster exports and curb deflationary pressures, the Swiss National Bank has continued to intervene to further devalue the currency. For instance, it was reported that on July 4, the Swiss National Bank conducted its largest purchase of foreign currency since January 2015 in order to protect exports to the eurozone in light of a falling euro and pound.

Given such intervention, it makes sense that the franc might not rise as much as would be anticipated in the current economic climate. As regards to what happens going forward, the Swiss National Bank will be mindful of the risk of further euro/pound depreciation, and will make attempts to depreciate their own currency accordingly. Moreover, it seems that market sentiment for the month of August - notwithstanding lingering economic concerns - will be less pronounced overall than in the immediate aftermath of Brexit and we have seen a short-term retracement of gold prices to $1322 at the time of writing accordingly.

To conclude, I stand by my original assertion and see a significant probability of downside in the Swiss franc for the coming month.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that foreign exchange is a fast-moving market, and the above analysis reflects the author's opinion at the time of writing only. The author's stated views/positions should not be taken as any form of investment advice, and the author may subsequently modify his views/positions on the basis of new information.