Doubting the Decade of the Franc

The Swiss franc is back to all-time highs against the euro, and the extrapolations have begun. This morning, Bloomberg reports that UBS expects the franc to remain strong for the entire decade:

“The Swiss franc will stay strong and investors should hold it as a proxy for the old German deutsche mark as the currency benefits from economic growth and its status as a haven, UBS AG said.”

This commentary comes on the heels of a good GDP report from Switzerland overnight. Second quarter GDP hit 0.9% quarter-over-quarter growth which was a fraction above expectations for 0.8% growth. With growth looking tepid in several major economies across the globe, it is understandable that bullishness on the franc would increase on this GDP report. However, as long as the Swiss National Bank (SNB) keeps interest rates low to remain competitive in Europe, the franc will increasingly look attractive as a funding currency for risk trades. The SNB is still maintaining interest rates at a rock bottom 0.25%.

I am highly doubtful risk aversion will last for an entire decade across the globe. If I am correct, the franc will suddenly appear very over-valued. For example, the franc would turn into a great way to fund longs in Australian dollars. Australia also had a great quarterly GDP print this week of 1.2% growth, higher than the 0.9% expectations. Interest rates in Australia are a very attractive 4.50%, and the economy continues to look relatively resilient and strong even as other major economies appear wobbly. Australia’s huge commodity reserves should come in handy if (when?) global central banks decide again to start printing more paper to stave off fresh economic weakness.

It is also strange to compare Switzerland to Germany. The Swiss economy was $462 billion in 2009. This was a mere 16% the size of Germany’s powerhouse $2.81 trillion GDP (Australian GDP was $851 billion last year). The Swiss should maintain a stable society for this decade and beyond, but it will not catch Germany anytime soon. In other words, I am guessing the Swiss economy is simply too small to serve as a sustained safe-haven for a planet full of fearful investors. Granted, the small size of the Swiss economy means a rush for safety in the franc could lead to a “super-spike” before this latest phase of panic ends.

I last wrote about the franc two weeks ago, claiming the technicals supported further gains in the franc against the euro. The technicals still support further downside, but I am looking out for a relief rally in the EUR/CHF currency pair within a week, before the downtrend resumes. Even so, I am wary of over-staying the welcome with long franc positions, and I am definitely not projecting to hold them over the course of years, much less a decade.


The franc continues to beat up on the euro
The franc continues to beat up on the euro

Source: dailyfx.com charts (Click for a larger view)

Be careful out there!

Full disclosure: short EUR/CHF, long FXA

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