One of the most surprising reversals in the currency markets so far this year has been the burgeoning strength in the Swiss Franc. This strength has been broad-based, occurring not only against the Euro but against the US Dollar as well. Since the Euro and Dollar tend to move in opposing directions over short term time perspectives, this essentially suggests that the strength in the Swiss Franc has been all-encompassing and broad-based. But can these trends continue? Are there fundamental reasons to believe that this Swiss Franc rally has run its course and that prices are now ready to reverse in the bearish direction? The answers to these questions are much clearer than they might seem and new positions in the Franc have some of the best risk to reward probabilities available in the currency markets.
Central Bank Stance at the SNB
When looking for new investment opportunities in Switzerland, the most immediate reaction for most online traders is to start looking directly at the stock markets. But for those looking to establish new positions in Swiss online trading, it makes much more sense to start looking at the underlying currency itself and to start considering short positions at current levels. One of the strongest arguments for new bearish positions comes from the established stance at the Swiss National Bank (SNB), which has consistently called for lower currency values as a means for supporting the country’s export companies. In 2011, the SNB established a price floor in the EUR/CHF currency pair that was designed to prevent the Swiss Franc from rising above 1.20 per Euro. (source: http://online.wsj.com/news/articles/SB10001424127887323648304578496950956458038)
Since this floor was established, prices have only breached the 1.20 barrier on one brief occasion and there is little reason to believe that these trends will be changing any time soon. At recent monetary policy meetings, the SNB has reiterated the need to maintain this price floor, so it is clear that the central bank feels as though Swiss export companies are still at risk for downside moves in corporate earnings growth if these measures are not extended. From a macro perspective, there is additional reason to believe that these policy measures will continue, given the fact that consumer inflation levels remain subdued and there is no immediate need for the central bank to begin tightening policy.
Chart Perspective: US Dollar / Swiss Franc
When we look at the chart activity in the USD/CHF, we see prices starting to stabilize after the 2011 declines into the 0.75 region. This is when the SNB stepped in with new policy rhetoric to prevent any further strength in the currency. USD/CHF rallies immediately followed, created excellent opportunities for new long positions that were supported by the implementation of the SNB’s historic policy stance. So far this year, a significant portion of this rally has retraced itself and this ultimately suggests that the pair is now a buy on the dip. As long as we do not head any major changes from voting members of the SNB, the pair should be relatively supported going forward.