By The Swiss franc continued its strong momentum this week, making it one of the best-performing currencies in the developed industry. The EUR/CHF exchange rate crashed to a low of 0.9415, down by over 5.175 from its highest point this year.
Similarly, the USD/CHF pair tumbled to a low of 0.8425, 8.65% below the year-to-date high of 0.9225.
Swiss franc as a safe haven
The Swiss franc has jumped sharply against other key currencies as investors move to it because of its safe haven features.
The Swiss franc’s surge has coincided with the movement of other key safe assets. For example, gold price has soared to a record high of $2,530 while silver has roared to $30.65.
A likely reason for this is that the Middle East has been on edge in the past few days after Israel launched an attack in Lebanon. The country also had an attack in Iran that killed Hamas’ top negotiator.
The Swiss franc is often seen as one of the top safe havens in the forex market because of Switzerland’s neutrality.
Like gold, the currency has also seen some demand after the United States and her Western allies launched sanctions on Russian officials after the start of the war in Ukraine.
While Switzerland launched some sanctions, it has been accused of being a highly lenient country. As a result, many Russians have continued to move their money to the country.
The Swiss franc is also seen as a safe haven because it is in a better fiscal situation than the US and other countries. Data shows that Switzerland has a debt-to-GDP ratio of less than 20%. Its total debt level stands at CHF 142 billion.
Switzerland can easily pay out these funds since the Swiss National Bank (SNB) holds over $794 billion in assets.
Therefore, as I wrote in 2023, as many countries start moving from the US dollar, the Swiss franc can make a good alternative.
Still, a strong Swiss franc is not necessarily a good thing for the economy since it is a big exporter. Indeed, recent data shows that most Swiss manufacturers had a revenue slump in the first half of the year, which they blamed on the Swiss franc. Sales fell by 5.1% from a year earlier, mostly because of German weakness.
Therefore, the Swiss National Bank is expected to start intervening in the currencies market in a big to weaken the franc. Analysts at Bank of America expect the bank to deliver more cuts later this year.
Federal Reserve cuts
The USD/CHF exchange rate has also plunged because of the rising possibility that the Federal Reserve will start cutting interest rates in the next meeting.
Recent economic numbers have made the case for cuts more pronounced. For example, the labor market has continued to underperform the market expectations. A revision last week showed that the number of jobs created in the 12 months to March was lower than the official numbers by over 818,000.
More data showed that the output in the manufacturing and industrial areas continued to fall last month.
As a result, the Fed will likely start cutting interest rates in its September meeting, moving from the current 5.50% to 5.25%. However, the Fed may still cut rates by 0.50% if the US publishes a weak jobs report next week.
The most recent data showed that the US unemployment rate rose to 4.3% last month as the economy added over 114k jobs. With last week’s revision, there is a risk that the jobless rate is much worse.
The Fed and SNB actions have already created a good carry trade opportunity. A carry trade happen when investors borrow from a low interest rate country like Switzerland and invest in a high-yielding one like the United States. While the spread is expected to narrow as the Fed and SNB cuts, it will be enough to justify borrowing the franc for now.
USD/CHF technical analysis
USD/CHF chart by TradingView
The USD to CHF exchange rate peaked at 0.9225 earlier this month and has moved to a near correction. It formed a death cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other on July 30th.
The USDCHF pair has also dropped slightly below the key support at 0.8430, its lowest point on August 5. Also, it has moved to the weak, stop & reverse part of the Murrey Math Lines, meaning that it has three more levels to go: ultimate support (0.8300), oversold (0.8178), and extreme oversold (0.8056).
The Relative Strength Index (RSI) has also moved downwards and sits at the oversold point at 28. Therefore, the path of the least resistance for the pair is downwards, with the next point to watch being at 0.8300.
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