Swiss Franc Has Safe Haven Appeal, But Fails as Pure Hedge against Risky Assets

http://www.dailyfx.com/forex/fundamental/article/drivers_of_price_action/2010/12/28/Swiss_Franc_Has_Safe_Haven_Appeal.html

USD/CHF

The Swiss Franc has been touted as a safe haven currency as Switzerland’s low budget deficit and track record of price stability makes the currency attractive in times of turmoil. Indeed, the neutral currency has reached record levels against the Euro and Dollar as the debt crisis heightens and the U.S. recovery remains in question. However, we haven’t seen the Swissie move counter to equity markets which is surprising as you would expect it to benefit from risk aversion flows. The USD/CHF is actually holding a 49% negative correlation with stocks as the dollar has reigned as the preferred shelter. We see this further when looking at the franc against the high yielding Aussie with the pair range bound despite the recent surge in risky assets. Against the Euro and Pound is where we see the strongest evidence of the Franc’s safe haven appeal, but trader shouldn’t trade the currency as a hedge against all risky assets. Recent SNB deflation talk could fuel intervention speculation, further weakening its relationship risk appetite.

Driver of Price Action	Current Influence	Correlation	Week Ago	Month Ago
CHF Interest Rate Expectations	Low	0.12	0.11	0.14
USD Interest Rate Expectations	Low	0.20	0.16	0.27
Risk (Dow)	High	-0.49	-0.48	-0.51

SNB Interest Rate Expectations

Swiss interest rate expectations took a tumble following the SNB’s last policy meeting where the central bank remained on hold. Overnight index swaps went from pricing in 27 bps to 8 bps in tightening over the next year. Leading up to the decision we saw an unexpected surge in the outlook for yields driven by signs of a sustainable recovery and easing concerns over the European debt crisis. SNB President Philipp Hildebrand stated that although the central bank growth to continue, “It is likely to be significantly lower in the quarters ahead, a development attributable to both the generally subdued economic activity in the industrialized countries and the appreciation of the Swiss franc.” The SNB in its quarterly report said it’s ready to “take the measures necessary” to counter deflation. We may see further verbal intervention from policy makers, which could temporarily diminish the Franc’s safe haven appeal. However, the central bank is virtually powerless to halt the currency’s appreciation following its earlier failed attempts that resulted in billions in losses. Discuss this and trading ideas join the USD/CHF forum.

Credit Suisse (OIS) SNB

Source Bloomberg – Prepared by John Rivera

FOMC Interest Rate Expectations

Fed funds futures continue to show very little chance of a Fed rate hike in the first half of 2011 which should help maintain the greenback’s appeal as a funding currency and hold its negative correlation with risk. However, monitoring the various monthly odds provides insights into market sentiment and possible dollar direction. Therefore, the increase in the odds for tightening for June from to 12.6% from 9.1% a month ago reflects a brighter outlook for U.S. growth. However, the potential for a rate decrease is still favored over tightening pointing to the FOMC remaining on hold until the end of next year at the earliest. Next week’s Non-farm payroll report could potentially shift the outlook for yields with economists expecting job growth near 135K.

Source Bloomberg – Prepared by John Rivera

Risk

An improved outlook for global demand lifted commodity names helping equity markets overcome a decline in U.S. consumer confidence. However, not all domestic data was disappointing as the Richmond Fed manufacturing index rose to 25 more than doubling expectations of 11. The strong surge in new orders shows that activity remains firm supporting the brighter outlook for raw materials. A report showing that U.S. retailers saw a 5.5% increase in holiday sales also added to building optimism, keeping the Dow within its ascending channel. Discuss this and other fundamental data in the Economics Forum.

Dow (10 Mins)

Source Bloomberg – Prepared by John Rivera

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com

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