Date: 05 Jul 2018

Traders’ identification of the Swiss franc as a safe haven, at times when risk aversion becomes the prevailing theme in the currency market, is a well-documented phenomenon. And recently, whether ascribable to market concerns over Italy, to broader international trade tensions, or indeed to specific market worries about the trajectory of the Chinese economy, there has been demand for the CHF. USDCHF, trading at 1.0200 early in June has tested parity. EURCHF drifted down from aroud 1.1650 to trade on a 1.14 handle before stabilizing and edging up. Perhaps what’s most intriguing about these moves is not the direction but how little the CHF firmed. After all there have been a lot of market factors that could have lent themselves to a safe haven bid for the Swissy. Of course, as traders will be fully aware, the hurdle for too much of a CHF rise is high given the continuation of ultra-accommodative monetary policy by the Swiss National Bank (SNB), and the market’s realisation that the SNB continues to stand ready, if it deems it necessary, to sell CHF on the currency market to temper the pace of Swiss franc appreciation. But that then begs another question. What if some of the existing factors, supporting a degree of risk aversion, diminish? In the case of China, Tuesday’s comments from People’s Bank of China (PBOC) Governor Yi Gang, that the PBOC is paying close attention to recent fluctuations in the foreign exchange market, could arrest the momentum of the yuan’s (USDCNH) recent fall, a slide that has arguably fed wider market risk aversion. Would one pillar of CHF support thus be eroded? Traders will have their own opinions but, with the hurdle for CHF strength set pretty high, the market might wonder about the advisability of being too long of Swiss francs if risk aversion becomes less of a prevailing theme. In that scenario, traders might conclude that short EURCHF and short USDCHF exposures would be less appealing.

Written by Neal Kimberley, External Currency Analyst.