Can the Swiss be Stopped?
Thursday, August 4, 2011
The Swiss Franc has become the safe haven currency of choice for many investors, due to Switzerland's isolation from the sovereign debt storm facing Europe. The currency's success could, however, spell doom for Swiss economic growth, and its success could become its undoing. The Swiss National Bank has begun to take action instead of idly sitting by, lowering target rates to zero and expanding its monetary base. Technically, the chart is beginning to show signs that the Franc may be running out of steam, at least in the short-term. Given the recent volatile and explosive nature of the Swiss Franc, options may be a more prudent play over futures. Some traders may possibly wish to consider entering into a bear put spread, buying the September Swiss Franc 1.30 put and selling the September 1.275 put for a debit of 0.0100, or $1,250. The trade risks the initial cost and has a maximum profit of $1,875 if the September futures close below 1.2750 at expiration.
Fundamentals
The Swiss Franc has been the top-performing western currency in 2011, but Zurich is concerned that the currency's meteoric rise will hurt economic growth. Switzerland's political neutrality has resulted in the nation not joining the EU, thus avoiding the debt malaise facing the rest of Europe. The Swiss National Bank decided to be proactive and cut its benchmark interest rate to zero in hopes of cooling off the Franc. Many investors may question whether this will be enough to cool off the currency. After all, it was not favorable interest rate parity that led to the surge in the exchange rate versus the major currencies, but the nation's fiscal responsibility and favorable debt to GDP ratio. The inflows into the Franc are not just short-term defensive or speculative plays. The debt ceiling compromise in the EU and the stop-gap measures to avoid national defaults simply extend problems into the future, without solving core issues. Widening the currency base (essentially quantitative easing) and lowering rates alone may not cool inflows from other currencies, so more proactive measures may have to be undertaken by the SNB to bring the Franc back down to earth.
Technical Notes
Turning to the September Swiss Franc chart, we see prices taking a parabolic shift since the beginning of July. This is a sign that the market could correct sharply, or possibly, enter a period of consolidation. Trying to pick a top, however, can be a very dangerous game to play with an explosive market. Some traders, instead, may wish to look for technical signs of topping followed by confirmation before declaring a top is in place. Yesterday's price action shows what appears to be a hanging-man candle. A hanging-man candle often appears after the market rallies and indicates that the trend may be weakening, or possibly set to reverse in the near-term. A large down candle following the hanging-man could offer confirmation of a reversal. The RSI is in the mid-80's, suggesting that the market is likely overbought. It is interesting to note that the RSI has failed to keep pace with the price of the Franc. The indicator has edged higher while prices moved sharply higher, hinting that the trend could be weakening.
Rob Kurzatkowski, Senior Commodity Analyst
