'Safe Haven' Swiss Franc Is Due for a DeclineAided by a number of developments, the Swiss franc has been the second-best performing major currency over the past six months, reports Bloomberg. Since March 29, the currency has outpaced the dollar and the euro by 8.9% and 7.8%, respectively.

First, growing fears about the risk of default by some European nations and the negative impact that could have on the eurozone economy -- and its common currency -- sent many investors scurrying to invest in what has long been seen as Europe's safe haven currency.

The Swiss franc has also been bolstered by the purchases of those who fear that renewed weakness in the U.S. economy and the likelihood of more monetary accommodation by the Federal Reserve will eventually lead to inflation that will drive down the value of the dollar.

Moreover, efforts by Eastern European governments to unwind low-interest franc-denominated mortgages taken on by citizens in those countries -- which have suddenly become more costly in local currency terms -- are exacerbating the squeeze, according to Bloomberg.

The Smart Money Is Betting Against the Franc

The key question, of course, is will the trend continue? While there's no guarantee that the franc won't keep strengthening, various technical and sentiment indicators, as well as some fundamental developments, suggest the Swiss currency is due for at least a short-term correction.

To begin with, the franc is at a level relative to the dollar that has been a major barrier to further strength in the Swiss currency. At the same time, the F/X rate and the trend of its 14-day RSI (Relative Strength Index), a measure of momentum, are diverging somewhat, a development that has often marked short- and medium-term turning points.

In addition, the smart money is making sizable bets against the Swiss currency. Based on data from the U.S. Commodity Futures Trading Commission, commercial traders -- defined by the CFTC as those firms that are engaged in business activities hedged by the use of the futures or option markets -- have their biggest short positions in the franc since December 2009, notes DailyFX.

Bullish sentiment towards the franc has also reached contrarian extremes. According to market blog Trader's Narrative, the Daily Sentiment Index reading for the Swiss unit has reached 95% (out of 100%), while a recent Financial Times report, Resurgent Swiss Franc Seems Unstoppable, was notable for its paucity of bearish perspectives.

To top it off, fundamental conditions are not as supportive as some might believe. In recent weeks, the Swiss National Bank has softened its previously hawkish stance (over inflation concerns), while the strength seen in the currency so far will likely weigh on the nation's exports, undermining growth overall and, ultimately, demand for the Swiss currency.

Right now, the Swiss franc might seem like the one investment you can't do without: That's often the time when savvy investors start thinking otherwise.

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Robert & Lisa

Gold is up 500% in 10 years. It's hitting new all time highs everyday now. What does that tell you folks? Maybe you should have been listening to Glenn Beck?

September 30 2010 at 7:25 AM Report abuse +1 rate up rate down Reply
Robert & Lisa

The price of precious metals tells the story

September 29 2010 at 2:36 PM Report abuse +1 rate up rate down Reply

I am no expert but I think the relationship you want to follow is not the Swiss Franc to the US$ BUT the Swiss Franc to the Euro. In the 12 mos. or so I have been invested in FXF. a franc EFT, the Swiss Central Bank has interfered only when the Swiss Franc outpaced the Euro. Their major trading concern is with the Common Market countries, and in the last 1-2mos the Euro has been getting stronger breaking through what appeared to be resistance at about 1.28 Euro to the $, the Swiss franc has been allowed to strengthen. When the Euro tanks or backs off then I would watch what the Franc is doing.

September 29 2010 at 11:54 AM Report abuse rate up rate down Reply