Home CHF looks promising, but don’t get complacent

CHF looks promising, but don’t get complacent

Switzerland is proving its mettle as a safe haven economy with exports and domestic consumption doing well; however traders should remember that one of the reasons for this performance is the successful devaluation of CHF.

As currency devaluations go for developed economies few were more spectacular than the raid carried out by the Swiss National Bank in September 2011. A combination of shock monetary and verbal intervention saw it plunge around 10% in one day versus EUR and USD – leaving many traders and investors nursing severe losses.

By Justin Pugsley, Markets Analyst MahiFX.  Follow MahiFX on twitter at:  https://twitter.com/MahiFX

The Alpine state seems to be reaping the benefits and resembles a paragon of economic health and stability compared to the languishing Eurozone, which sits around its borders. GDP rose 0.6% in Q1, 1.1% on the year, and easily trouncing analysts’ expectations of 0.2% and 0.3% in the previous quarter. Since the devaluation Switzerland’s current account surpluses have shifted into double digit territory.

All this is very supportive for CHF, but even more so is the fact that the country is experiencing a real estate boom. These are usually very bullish events for currencies as speculators know that at some point the central bank will need to raise interest rates to douse inflationary pressures.

Beware of a CHF rally

USDCHF-chart May 31 2013 for technical analysis of currencies trading forex Swiss franc US dollar

Though CHF does have some upside potential, it would be foolish to expect to ride CHF too far on the upside versus EUR and USD. Exports are a key focus for Switzerland and the SNB is likely to intervene again, verbally at first, if there are signs that country is becoming uncompetitive in global markets.

Rather than raising interest rates, the SNB is looking to use macro-prudential tools such as forcing banks to hold more capital against mortgages to reduce the supply of funding to the real estate market. Though such measures can be effective, higher interest rates are often the best medicine to cool a run-away real estate market.

The issue of a strong currency will become all the more pressing if the global economy doesn’t pick-up momentum as other countries will focus on currency wars to gain market share with Switzerland being among the winners so far.

However, a very likely reignition of the Eurozone crisis will send more capital rushing for the safety of Switzerland and would also put upward pressure on CHF.   All these factors suggest that the SNB could face some tough decisions in its bid to keep the national currency on a leash.

Switzerland as a country definitely remains a safe haven thanks to its enviable record of political and economic stability. The same cannot be said for its currency.

Justin Pugsley

Justin Pugsley

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice