USDCHF continues embarking on yet another climb this week after previously finding support at the 0.95 zone, as depicted on the 1 Day timeframe above. This is the third time this has happened since April of this year, each prior occurrence connecting with the 1.00 resistance zone, followed by price action reversal. The odds of it testing the 1.00 resistance zone yet again seem reasonable, especially when considering how most (74.36%) institutional traders are currently shorting CHF according to last week’s COT data. What, then, makes the Swiss Franc enticing to buy? The truth is, there is a lot for CHF bulls to be excited about long-term; let’s discuss 4 reasons to buy CHF.
Safe Haven Reputation
The European and worldwide economic crises that unfolded over the past decade and a half have cemented CHF’s status as a safe haven currency. This is due to many factors, including Switzerland's remarkable economic conditions (that we will discuss shortly), robust trade relations with the EU, and a promising currency valuation in contrast to the debt crises that have plagued various other European countries, according to Forbes (read more here).
The buying pressure resulting from the Swiss Franc’s safe haven reputation is so present that is has proven itself to be a pervasive thorn in the side of the Swiss National Bank (SNB), Switzerland’s central bank, for years. The SNB has gone above and beyond to stave off undesired CHF appreciation by many means, including zero/negative interest rates, pegging CHF against EUR until 2015, and frequently intervening in foreign exchange markets as a CHF bear, for the sake of trade convenience.
The Swiss economy claims certain particularly coveted features that set it apart from many other developed counterparts. While the country benefits from economic highlights such as stable GDP growth, an impressive 2% unemployment rate, and mild-to-modest inflation (in part due to monetary stimulus), the nuances of Switzerland’s economic performance are far more unique than this data alone reflects. For one, Switzerland’s economy boasts a median income and GDP per capita among the highest in the world, boosted by substantial trade surpluses due to plentiful exports to the EU, its primary trading partner. On top of this, other factors that set it apart include a huge services sector, an unusually highly skilled labor force, a powerful pharmaceutical industry (which accounts for a large chunk of exports), and agricultural protectionism.
While Switzerland’s reliance on European, particularly German, demand can be perceived as a liability, especially nowadays as Russian tensions and hyperinflation in the eurozone could possibly curb demand for Swiss products, it nonetheless remains a long-term perk. The EU’s economy remains powerful even facing threats of stagflation, and the European Central Bank (ECB) has recently proven cautiously open to rate hikes. Also, annual inflation in the eurozone is currently more than twice as hot as in Switzerland, and wages for European workers aren’t static, leaving some breathing room for CHF to continue rising against EUR without negative trade consequences.
Higher Interest Rates
A recent variable that has thus far created more CHF bullishness is the SNB’s shocking decision in June to implement a surprise 50 basis point interest rate hike to combat rising Swiss inflation. While the SNB’s target interest rate remains below zero at -0.25%, this was nonetheless an unexpected pivot from years of expansionary precedent. That Switzerland’s 3.4% year-over-year inflation would prompt a contractionary response that aggressive is certainly bullish for CHF, since it attests to a distinctively hawkish change of tune from the SNB.
Less FX Intervention
Another crucial abandonment of precedent from the SNB is a recent departure from its years-long strategic devaluation of CHF against other currencies. As mentioned previously, the SNB has regularly weakened the Swiss Franc via foreign exchange markets, selling CHF to purchase other currencies, such as EUR, in order to optimize export affordability for Switzerland’s trade partners. This standard appears to have changed within the past several weeks, as many analysts are interpreting the SNB to have abandoned this mode of CHF intervention altogether in favor of tackling inflation concerns, allowing buying pressure for the Swiss Franc to potentially advance unchecked. This is shockingly bullish for CHF and may have long-term bearish implications for EUR as well (read more here).
Best Pairs to Trade
While CHF bulls have much to be enthused about in terms of fundamentals, shorting USDCHF could be interpreted as playing with fire. They are both respected safe haven currencies, and the Swiss Franc has no history as the world’s reserve currency. Rather, minor pairs may prove to be far safer bets for conservative traders. For example, shorting EURCHF has potential due to the SNB no longer providing artificial support for the pair, which has just plummeted to its lowest levels since 2015. CHFJPY is likewise at its highest level since 2015. While Japan is comparable to Switzerland in terms of being a flourishing export economy with low unemployment, ultraloose monetary policy, and a safe haven reputation for JPY, the Bank of Japan has not revealed a firm pivot towards hawkishness just yet, which is bullish for CHFJPY.
CHF has experienced an oscillating technical performance against USD over the past few months, as well as currently unsavory institutional sentiment, with 74.36% shorting CHF.
The Swiss Franc has a renowned reputation as a safe haven asset, which is a historically meaningful label considering its unique relationship with the Euro, relative price stability, and meticulous monetary policy coupled with foreign exchange rate interference.
Switzerland has a uniquely strong economy for today’s global conditions, including 2% unemployment and growing GDP; despite the Swiss National Bank’s (SNB) efforts, moderate inflation is accelerating, hitting 3.4% year-over-year.
These rising inflation rates, unusual for Switzerland, recently prompted the SNB to issue a surprise 50 bp interest rate hike for the first time in years, signaling newfound hawkishness.
The SNB has habitually intervened in CHF’s value in the foreign exchange markets for years, strategically depreciating its value for trade reasons. However, this precedent has recently at least slowed, if not been abandoned altogether.
While it is difficult to say how much of CHF’s bullish thunder could be stolen by an ever-stronger USD, there may at least be bearish momentum for EURCHF and bullish momentum for CHFJPY left in store.
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