Bitter Swiss Cheese or Dollar Cheaper than Franc

After all surges, USD/CHF got stuck in the channel between strong support: 0.8590 – 0.8490 and resistance: 0.8870 – 0.8900
It has been a long time since the financial world has experienced such a shock. Long-time trust to franc as the reliable protective asset was undermined by the regulator's "pirate" activities. As early as on last Monday, retention of euro balance was the basis of the monetary policy, then on Thursday, SNB made the decision to eliminate the fixation of franc to euro in combination with the new interest rate decrease. The largest global hedge fund ceased to exist.

Everybody experienced dramatic surges from this temporary loss of market understanding. It is difficult to assess yet how much franc has gained from it; however, it is absolutely positive for gold, yen, and US dollar. The stock market was the one to suffer the most. American and European indexes have already worked out, but Asian, for instance, Chinese Hang Seng (HSI) are still to suffer losses. UBS AG and Credit Suisse banks have lost more than 12% of the market value. UBS Group AG has been holding activities regarding the transfer of large clients to US dollar, although the ultra rich investors' demand for American assets has almost doubled without it.

Swiss SMI, on Thursday alone, lost around 9%; tourist companies, forwarders, and large exporters that receive their proceedings abroad suffered the most. The next impact will affect raw material traders (more than 500 registered in Switzerland) who produce around 3.6% of GDP annually (CHF 20 bln, equivalent of USD 22.2 bln). It is still difficult to make an estimate of the catastrophic growth of salary expenses. Risky investments in stocks will not be relevant for a long time to come. The market, which slightly stabilized after record-breaking fluctuations, is trying to explain the reasons of such steps in the situation that is not yet critical for franc. Let's single out the most discussed issues; the most important of them are still difficult to define:

  • Adapting the small Swiss economy to aggressive FRS and ECB behavior, when America is threatening to increase rates, and Europe and Japan are moving asynchronously;
  • A new attempt to decrease the volume of money influx from crisis-stricken regions, in particular, from Russia and Greece;
  • European Court approval of the idea of European countries' bond purchase by ECB;
  • Pre-emptive response to the possible announcement of the ECB's decisions regarding quantitative easing, after which euro will have a free flight (downward) and supporting undervalued franc rate would be too expensive.
Now, franc rate is the closest to acceptable, but euro, due to SNB's refusal to purchase, lost another significant support. The loss of clients' business trust and reliance on National Bank statements have not yet been taken in to account by economists. It is only the main effect of a bombshell that remained behind the scenes. There is a new currency paradox - 1 CHF is worth 1.17 (1.270 - max) USD. By a single pressing of a button, huge capitals were transferred from American dollar to the currency of the little Switzerland. It looks like a standard conspiracy arranged by SNB and the largest market makers. Someone simply wanted Switzerland, in order to compensate for the gap between EUR and USD, to reinvest funds from redemption of European papers to US treasury bonds. That means: both to invest funds and to protect itself from the fall of the greenback, plus receive quick profit from the nervous market. The only thing is that now, Swiss development forecast goes down from 1.8% to approximately 0.5%, and the effect from negative interest rates that were introduced will be lost. However, that was needed at this moment.

After all surges, USD/CHF got stuck in the channel between strong support: 0.8590 – 0.8490 and resistance: 0.8870 – 0.8900, which, again, puts pressure on EUR/USD pair. Despite the fact that euro has gained a part of losses from falling to more than 10-year minimum, the overheated market has not yet formed its own opinion regarding the response to possible easing. Key points: ECB meeting on January 22 and Greek elections on January 25. The fall potential has not been worked out yet, and against the background of massive closing of short positions before key events, there is a possibility to return to 1.1570-1.1600 with the following fall to 1.1325-1.1275 zone. After that, the dangerous Thursday will arrange everything back to order.

Author: Navsher Bartash,
ForexChief Currency strategist