The strength in the Swiss Franc has accelerated. Even as the euro has stabilized somewhat against the U.S. dollar the past two weeks, the franc continues to set new record highs against the euro. The monthly chart of the euro vs the franc (EUR/CHF) shows how rapidly the franc has gained steam just in the past month.
The franc has even gained over 6% on the U.S. dollar in June.
I am finding it more difficult to determine whether the Swiss National Bank (SNB) has finally resigned itself to these developments. During its latest monetary policy assessment June 17, the SNB declared “…the deflationary risk in Switzerland has largely disappeared” as foreign demand for its exports has more than offset the competitive disadvantage of its record strength against the euro.
On the other hand, the SNB still seems to fear appreciation in its currency (emphasis mine): “…uncertainty has increased since the last monetary policy assessment. The latest tensions on the financial markets, particularly with regard to the public finances of some individual countries, have increased the downside risks. Should these downside risks materialise and, via an appreciation of the Swiss franc, lead to a renewed threat of deflation, the SNB would take all the measures necessary to ensure price stability.” Moreover, the SNB statement BEGINS with an emphatic statement supporting currency weakness: “The Swiss National Bank (SNB) is maintaining its expansionary monetary policy.” The SNB appears both accepting of the strength in its currency and ready to try again to weaken it.
The chart below emphasizes the futility of the SNB’s interventions to-date. The SNB never acknowledges specific currency actions, but most forex-watchers seem to agree that the large spikes upward on EUR/CHF represent SNB interventions. These large spikes have only temporarily disturbed the extended downtrend.
While I would love to hop on the downtrend, I cannot shake the expectation that the SNB may try to intervene yet again, especially if the budgetary crisis in euro-land gets worse. Moreover, the SNB has only slightly increased its inflation forecast over the current year. For the two years after that, the forecast remains the same – not a strong recipe for faster or unexpected rate hikes in my opinion.
I would prefer to fade interventions rather than blithely assume the resulting spikes will not show up again. In the meantime, I periodically play the pound and/or the U.S. dollar against the franc for short-term plays when key support levels appear (like now).
Be careful out there!
Full disclosure: long USD/CHF and GBP/CHF