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The Swiss Franc Pulls Ahead Of The U.S. Dollar

by: WWS Swiss Financial Consulting SA
WWS Swiss Financial Consulting SA
Debt, long-term horizon, Contrarian, Investment Advisor
Summary

US dollar weakness continues.

The Swiss franc is in demand.

A continuation of Swiss franc strength is unlikely.

The US dollar and the Swiss franc are still widely considered to be safe haven currencies. Recent US dollar weakness has resulted in appreciation of the Swiss franc. This may bring about a reaction from the SNB (Swiss National Bank).

Dollar Weakness Continues

The US dollar has recently weakened against the Swiss franc. The greenback is currently trading at 0.9109. Less than a month ago it was over 0.9400.

In order to get a better idea of the extent of current dollar weakness against the Swiss franc one can examine a five-year chart. The US dollar has not been this low against the Swiss franc for the last five years, moving in a range from 1.02 to 0.94. This clearly shows that US dollar weakness has become more pronounced.

There is also a slight correlation with the performance of the US currency in the dollar index (DXY), but this is rather a reflection of performance against the euro.

US dollar performance against the euro can be seen in the EUR/USD chart below. Euro strength is correlated with dollar weakness.

Demand for Swiss Francs

The current situation seems to indicate an increased demand for Swiss francs. As far as the Swiss are concerned, there is really only a fairly successful fight so far against the COVID-19 pandemic in comparison with the US. The Swiss economy has suffered less than the US economy. The request for Swiss francs should be seen in the light of a general flight from the US dollar, which can be attributed to the US financial crisis, Fed money printing and the disastrous economic effects of lockdowns justified by combating the virus. It does not seem that the earlier lockdowns have been very successful in eliminating the virus as it is still virulent in the US, and the situation is apparently even worsening in some states where Democrat governors appear ready to reverse the opening up process. A further continuation of the lockdown policy would worsen the already dramatic economic situation in the US.

Intervention on the part of the SNB

It is unlikely that the current strength of the Swiss franc will be acceptable to the SNB (Swiss National Bank). An expensive Swiss franc would make Swiss export industries less competitive globally. These would include MEM (machinery, electrical engineering and metals), chemicals and pharmaceuticals. There is also tourism, which is an important part of the economy. Watches and chocolate are not the most important industries. In the past the SNB has usually intervened on the Forex markets by selling francs and buying euros or dollars, depending on the current situation. In this case one can expect the SNB to sell francs and buy dollars. Subsequently the SNB will probably buy US stocks. This is probable even if the US stock markets have not only recovered from the March lows but have reached new highs. It should be noted in this context that Switzerland still has industries that compete internationally, and the preoccupation of the SNB with the welfare of these industries and the possible outsourcing of production in the case of excessive strength of the Swiss franc justifies the intervention of the national bank in the Forex markets. The SNB has been guilty of currency manipulation in the past, and there is little likelihood that the SNB will change its policy at the present time.

This is one reason why the SNB has such a large balance in comparison with the size of the population of the country. The currency manipulation shows up in the bank’s balance (in millions of francs).

It remains to be seen how successful the SNB will be in trying to stop the rise of the value of the Swiss franc in the event of continued US dollar weakness.

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: Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.