Back in April, I made the argument that the Swiss franc had reached a bottom, and we could expect the currency to rise from here.
In the past month, we see that the Swiss franc has seen significant growth against the greenback, outpacing even that of the Japanese yen:
The main reasons that I had hypothesised the franc to grow significantly were:
- Potential overheating of the Swiss property market necessitating a rate hike
- The currency has shown significant strength against the euro in spite of negative rates
- Growth in the currency is being driven by risk-off sentiment rather than interest rates
The Swiss franc (and the yen to an extent) have been pushed up on reports that the Federal Reserve is getting ready to cut interest rates. However, developments appear to be afoot as regards US-China trade talks, and with President Trump anticipated to suspend the next round of tariffs and reversing the ban on Huawei, the U.S. dollar has rallied, and the Swiss franc has seen a sudden reversal in growth.
That said, it remains to be seen whether the boost in risk-on sentiment is temporary, or whether this could in fact be a good time to buy the Swiss franc on weakness.
Personally, I see it as unlikely that the news on China will significantly change the Federal Reserve’s view on the economy. Just recently, mortgage rates in the United States hit the lowest level in 31-months, highlighting that the housing market in the U.S. is still on shaky ground, and rate cuts are still on the table if necessary to stimulate growth.
As for where this leaves the Swiss franc, the currency will still be driven largely by sentiment. As a safe-haven currency, the CHF is not particularly influenced by domestic interest rates, and will continue to appreciate for as long as risk-off sentiment continues. Moreover, with the ECB proposing to ease policy further to boost inflation in the euro zone, this is likely to place further upward pressure on the franc going forward.
Additionally, we see that the CHF/EUR is still trading significantly below the 0.94 level that we saw at the beginning of 2017. Should we see further weakness in the euro, then it is quite possible that the currency could hit this level by the end of this year.
Ultimately, I continue to take a bullish view on the Swiss franc and expect to see further upside.
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.