Short The Franc Even As Negative Rates Are Proving Insufficient To End Strength Versus The Euro

Includes: FXE, FXF, UUP
by: Duru


The Swiss franc appears headed for another test of the 1.20 floor imposed by the Swiss National Bank against the euro.

At the same time, the U.S. dollar has been able to break above parity against the Swiss franc and looks ready for further gains.

With the Swiss National Bank still keenly interested in weakening the franc versus the euro, shorting the franc is starting to look MORE attractive than shorting the euro.

Don't look now, but the Swiss franc (NYSE:FXF) is seemingly back for another test of the 1.20 currency floor against the euro (NYSEARCA:FXE).

The Swiss franc has almost reversed all its losses against the euro from the announcement of negative rates

When the market forced the hand of the Swiss National Bank (SNB) to take additional measures to weaken the franc, the SNB rolled out negative interest rates. As the chart above shows, the impact was immediate, yet the market's preference to fade the weakness was also immediate. Now, almost three weeks later, the Swiss franc is practically back where it started. This time, it is far from clear what else the SNB might do to keep its currency off the self-imposed floor. Given the on-going flight from the euro, the SNB might have to slash rates a LOT lower before the market blinks. Yet, such a move also seems unlikely and unpractical. From a timing perspective, the SNB may also need to wait to see what additional measures the European Central Bank (ECB) implements to combat deflation in the eurozone.

In the meantime, the Swiss franc IS continuing to weaken against the U.S. dollar (NYSEARCA:UUP) - so much so that the USD/CHF currency pair returned to parity to start off 2015.

The U.S. dollar re-achives parity against the Swiss franc

This weekly chart suggests that the U.S. dollar is breaking out against the Swiss franc and can very easily rally to highs last seen in 2010. This move is important because to the extent that the market believes the Swiss franc is a "safety currency," it makes the U.S. dollar look like an even greater well of safety. To carry this logic to its natural conclusion, it means that even as EUR/CHF moves little, it is the steady rise in USD/CHF which should make the rest of us wonder what safety are currency traders seeking?

These dynamics now make me prefer shorting the Swiss franc over shorting the euro. For example, it is very possible that the next monetary policies out of the ECB instill enough confidence in the market that traders start bidding the euro UP in anticipation of better days ahead. In such a case, EUR/USD becomes an amazing, contrarian play. But this will still leave the SNB unsatisfied if EUR/CHF stays just as low as ever with the franc bid up in sympathy. In other words, the onus of weakness seems to lie now much more heavily on the franc than the euro. Time should soon tell.

Oh the ironies! When the euro was last THIS week, the running fear was a collapse of the entire monetary union.

Source for charts:

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 long the U.S. dollar, short the euro and short the Swiss franc