The Swiss Franc and it’s chequered past…

Marius Paun | London, UK | Senior dealer | Wednesday, 20th November 2019

The Swiss franc, the currency of Switzerland and its smaller neighbour state Liechtenstein, has historically been considered a haven. That is also the status of the Japanese Yen as the world’s biggest creditor and the US dollar as the currency of international trade.

There are a few reasons for these accolades. First is that Switzerland is considered an extremely well-run economy, a mature democracy with a positive trade balance and has a solid legal system. Secondly, traditionally it was a legal requirement for the franc to be backed by gold reserves. That backing was a whopping 40%, which in relative terms was a high percentage. The gold standard was terminated on May 1st 2000 following a referendum wand Switzerland was among the last countries to abandon that link. However even currently, a simple division of money supply to gold reserves puts that backing at around 20%.

So it is easy to see the Swiss francs’ appeal to investors, especially during the eurozone crisis. But as cash moved to Switzerland from struggling economies like Greece, Spain, Italy the franc soared considerably. In the process that started to hurt the Swiss economy by making exports less competitive. This, in turn, leads to a string of companies issuing profit warnings at the time and even threatening to move operations out of the country due to this increasing strength of the franc.

Consequently, on September 6th 2011 the Swiss National Bank took the decision to cap the franc against the euro at 1.20, thus capping its own currency appreciation. They added that they ‘are prepared to buy foreign currency in unlimited quantities’ (and sell their own currency). In reaction to that decision, which shocked the markets, the franc immediately lost 9% – 10% against the euro and the US dollar. Famously, the franc lost 9% against the US dollar within just 15 minutes. Nonetheless, the rally resumed shortly after and on December 18th 2014 the Swiss central bank had to introduce negative interest rates on bank deposits to support the franc cap, in a desperate attempt to reduce the demand for their currency.

However, important events on the global scene came back to bite the Swiss National Bank, showing that central bank intervention is a double edge sword. The debt crisis in the US and subsequent reactions in the euro area pushed their respective monetary policies to become more accommodative. Cutting interest rates to zero was not enough so central bankers resorted to something rather new – quantitative easing or QE.  In a few words, QE is large scale government bonds purchases to inject liquidity into an economy in an attempt to stop a deflationary spiral.

The QE program from European Central Bank was expected to weaken the euro and in turn force the Swiss National Bank to print even more francs to maintain the ceiling. Along with haemorrhaging currency reserves, there were widespread concerns that ongoing swiss franc printing would lead to potential hyperinflation. So shocking as it might seem, the SNB was forced to unexpectedly remove the peg of 1.20 francs to the euro on January 15th2015. The initial reaction saw the Swiss franc rallying a massive 30% against the euro and 25% against the US dollar. It caused chaos in the market and even forced a few foreign exchange brokers to close. The credibility of the Swiss central bank came under heavy questioning.

Interestingly enough those negative interest rates are still in place in Switzerland today!!! Recently, Thomas Jordan, Swiss National Bank chief expressed concerns about the fragility of the foreign exchange market saying they stand ready for further intervention as and when necessary.

Looking at the long-term chart in US dollar against the Swiss franc we notice the trend is by and large downward which means the franc appreciated for reasons given above. However, we can also see that since October 2011 USDCHF has been on a sideways trajectory. The price action was locked between the high of 1.0340 (tested in Nov-Dec 2015 and then again in Dec 2016, Jan 2017) and the low of 0.8290 in January 2015 (when SNB lifted the cap against the euro).

The 9 and 21 month moving averages have crossed each other a few times since 2011 but we know that without trending markets the signals may prove rather false.

On the way up, the first level of resistance is the psychologically important 1.0 level followed by 1.0100. Next, is the 50% Fibonacci retracement at 1.0170 from a high of 1.3283 touched on Nov 2005 and the low of 0.7066 reached on Aug 2011. Ultimately to change the intermediate outlook to bullish 1.0340 would need to be retested and eventually breached.

On the way down, the first support will be met around the 0.98 handles followed by 0.9660. Interestingly, both levels have switched a few times between support and resistance, proving reliable inflexion points. The 38.2% Fibonacci retracement at 0.9440 comes next. Further down the 0.9200 – 0.9250 channel was solid support which, when last touched, attracted enough buyers to spark a meaningful recovery. Ultimately, only a cross below 0.8290 will shift the medium-term trend from sideways to bearish.