Tuesday, 26 July 2011

Swiss CHF - The best safe haven in current uncertainty

Swiss Francs have been part of the safe haven gang since its low interest rate and low borrowing cost. The currency had been the top safe haven choice since the start of the Euro crisis that sparks off from Greece and now reaching to a number of European countries' doorsteps.

Switzerland is a prosperous nation with a gross domestic product (GDP) higher than that of most western European nations.

As illustrated, Swiss GDP grow 0.3% in the first quarter 2011. It has been in positive growth for the past 7 quarters. The monetary policies have been relatively effective to a certain extent which allow the country GDP to rise again. The value and strength of the Swiss Franc (CHF) has been relatively stable compared with that of other currencies, especially against Euro. This can be understood by the fact that money flowing out from Euro has to land up in somewhere that is safe and secure for the time been, and also easy to access in quick succession. Swiss Francs is a great choice as it's residing in almost centre of Europe. In addition, we cannot disregard the fact that Swiss bankers are long time bankers and are better deposit bank than others; many people now still prefer to deposit cash into Swiss banks because of its banking secrecy and strict regulations. Also, we must not forget that it is the home for companies in different industrial sectors like food processing like NestlĂ©, chemical for industrial and construction use like Sika AG, pharmaceutical like Novartis, roof coating Sarnafil, among many others.

However, the strength of it seems to make it the most overvalued currencies currently. Take EUR/CHF for example, it has maintained its downward trend channel since April 2011 and is still showing strength everyday.

These strength in Swiss CHF are mainly because of;

  1. Risk-off trade which allow a surge for safe haven, which CHF is the hottest choice now
  2. The monetary policies that were implemented
  3. Low interest rate and borrowing cost
  4. Carry trade is no longer effective now
  5. Euro is in a terrible state
  6. Low confident in Euro as view by Hedge Fund and analysts
  7. US Debt Crisis is also another big blow to the world economy
  8. Risky assets have mostly returned to their before Lehman collapses price.
  9. Retail traders are always the last to fled from their trade, and if they are doing it, means that will be the final onslaught.

From the above chart on EUR/CHF, MACD is showing signal that its retracting upward, RSI is retracting upward too after last week's all time record low, and also downward channel have been broken twice, one after the Greece austerity bill passed in their Parliament, and another one after the second Euro bailout package for Greece. These maybe seem as a relief rally for Euro against Swiss. Sentiment is very low at the moment, which we may see continue downward pressure of Euro.

But again, Switzerland economy is affected by their expensive currency. Imagine your own citizen and industries will feel the pain when it comes to profit; it will be affected when FX exchange comes into play. I believe the central bank of Switzerland will intervene before things get out of hand.

After all, i do believe what goes up, must come down to equivalency. Since its at record high, possible central bank intervention,  chances of Euro to save themselves out of the mess and kick the problem to a later date, plus there will always be contrarian traders that will hedge against rising CHF even its a better safe haven, i prefer to view that CHF will reverse against most currencies in medium term.

Bottom line, facts and happening still show people prefer swiss bank for their deposit. Perhaps we are going back to basic soon? I don't know.


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