The Swiss Franc - Good as Gold

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

Many investors consider gold to be the ultimate "safe haven" investment. Sure enough, following the collapse of Lehman Brothers in September 2008, and through all the thick and thin since then (certainly more thick than thin), gold has delivered enviable returns...and, with much desired low volatility.

Currencies have also served as safe havens for global investors. From time to time, the U.S. dollar, the Japanese yen, the euro, the British pound and the Swiss franc have all served as safe havens. Currently, there is one currency that stands apart and well above the others as a safe haven: the Swiss franc.

This year nervous investors have been flocking to the safety of the Swiss currency in the midst of:

• Heightened fears over sovereign debt in the euro zone
• Lingering worries over conflicts in the Middle East
• Economic and political troubles in Japan
• Ever-increasing concerns about the health of the economy and, more recently, the government's debt ceiling in the United States

Fundamental analysis 

In addition to its status as a safe haven currency, let's highlight other reasons why the Swiss franc may be the currency of choice among global investors:

• The safest of the European currencies - All the talk in Europe is about sovereign debt default risk, whether for Greece, Portugal, Ireland or Italy; worse yet, European officials are spending more time bickering with each other than talking about tangible ways to improve the situation. No wonder investors see the franc as the safest and the most appealing of the European currencies.
• Low inflation - Swiss June CPI -0.2 percent MoM and +0.6 percent YoY are among the lowest of all industrialized countries (only Japan with -1.2 YoY is lower).
• Domestic economic recovery - The Swiss economy is forecasted to grow at a respectable 2.4 percent this year and 2.1 percent in 2012. Consumer spending, retail sales, and manufacturing, although uneven, are trending higher, and are upbeat enough to bring Switzerland's KOF Leading Indicator to its highest levels in three years.
• Low unemployment - Switzerland's 2.8 percent is the lowest unemployment rate of the largest 50 industrialized countries (only Singapore with 1.9 percent and Thailand with 0.7 percent are lower).
• Strong trade balance - Swiss exports have surged in spite of (possibly because of) the strengthening franc; in addition to cuckoo clocks (of course), exports of textile machines, jewelry (including watches), tobacco products, and Agro chemical products all showed significant increases year-on-year.
• Low government budget deficit - Switzerland's government budget deficit is equivalent to 1.3 percent of their GDP, among the lowest of the G-20 member countries. Only South Korea with +1.6 and Saudi Arabia with +12.7 budget surpluses are in better fiscal shape).

The Swiss National Bank - stuck between a rock and a hard place 

Swiss exporters, Swiss banks, and Polish, Hungarian and other Eastern European mortgage holders are all suffering ill effects from a strong Swiss franc. Unfortunately, intervention in the FX market by the Swiss central bank to weaken the Swiss franc is not an option. The Swiss National Bank and its President Philipp Hildebrand have little credibility in the market place after suffering an embarrassing loss of CHF 20 billion from failed intervention in 2010. Don't expect to see them again any time soon. 

Technical analysis 

Since peaking in mid-June last year, the U.S .dollar has fallen against the Swiss franc (CHF) from 1.16 to 0.81 (Swiss francs per US dollar), a decrease in value of 30 percent. As you can see in the USD:CHF chart below, the FX rate is currently at 0.8175. Technically, the rate is trending lower based on its relative position below its down trend line (in red) and its 200-day moving average (in green).

USD:CHF

Source: Bloomberg 

More importantly — for European investors anyway — over that same time period the euro has depreciated against the Swiss franc from 1.35 to 1.14 Swiss francs per euro, a decrease in value of 18 percent. The EUR:CHF cross-rate is currently trading at 1.1476 and it, too, is trending lower as it trades below its down trend line and long-term moving average. Some market pundits are forecasting that the euro could fall to parity (1:1) against franc. There are currently no technical reasons to counter that prediction.

EUR:CHF

Courtesy: Bloomberg 

The bottom line - stick with the trend 

As we suggested last month with the Canadian dollar, don't bet against the Swiss franc...not yet, anyway. There are enough fundamental and technical reasons to support the Swiss currency for some time to come. The only caveat: a significant and secular change in the market's appetite for risk — from "risk on " to "risk off" (aka THE BIG REVERSAL) — would put the U.S. dollar back on top as the #1 safe haven currency. In that admittedly low probability scenario, global investors would sell many of their foreign currency positions, including those in the Swiss franc. And, gold...even it would not be spared. Whatever the case, we will do our best to give you a heads up if and when The Big Reversal is nigh.