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
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
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
- 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
- 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
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.
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).
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.
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.
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. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.