The Swiss franc (CHF) has seen substantial volatility in the first quarter of 2016, as financial markets experienced a tumultuous start to the year. Stocks dropped around 10% while oil dropped around 35%, before recovering again in March. During that time the Swiss franc lost value against the US dollar, as more funds moved in the USD as investors pilled into US Treasuries. Whereas the franc also weakened against the Euro due to expectations that the SNB (Swiss National Bank) could intervene in the currency market given the market turmoil. Since stock markets have started to recover again in March, the CHF has seen continuous strengthening against both the USD and the EUR.
The CHF is a safe haven asset
The Swiss franc is widely considered a safe haven currency and, therefore, a great asset class to put your money into during times of market turmoil. This makes the Swiss franc somewhat similar to gold. In fact, the two asset classes show a high correlation and the Swiss franc is often seen as a safe haven alternative to gold. Hence, if you are bearish about economic developments in Europe and you are holding euros, then transferring EUR to CHF might be the right option for you.
HSBC recommends buying CHF to hedge against ‘Brexit’ risk
Furthermore, British bank HSBC recommends buying the Swiss franc as a hedge against a possible steep decline in the pound, should the UK vote ‘yes’ at the ‘Brexit’ referendum on the 23rd of June. HSBC makes the argument that the CHF will likely strengthen should the UK public vote ‘yes’ to Britain leaving the EU, as more funds from the UK will flow into the safe haven currency CHF. On the other hand, should British voters decide to stay in the EU, the CHF won’t be negatively affected by that outcome. Hence, it could be the right trade to put money into the CHF ahead of the ‘Brexit’ referendum in late June.
Now might be the right time to go long the Swiss franc
While global stock markets have recovered and overall market sentiment has improved in the last month, most analysts still expect that 2016 will be a difficult year for the financial markets. The volatility in the price of oil, geo-political trouble in the Middle East, US elections and uncertainty over the timing of the next Fed rate hike, the next round of Greece bailout talks, a potential slow down in Chinese growth and sluggish global economic growth are all factors that will likely contribute to a bumpy year in financial markets. This is the main reason why looking at safe haven assets, such as the CHF, is on many investors mind.
If you are holding the majority of your assets in euros or US dollars, then it might be time to exchange some of that into the Swiss franc. With slow growth in Europe continuing and a fed rate hike getting pushed further down the road this year, the most likely scenario is that the Swiss franc will strengthen against both the euro and the US dollar. While, more UK investors will likely buy Swiss francs to hedge themselves against a possible steep drop in the British pound should the ‘Brexit’ become a reality.
Watch out for SNB interventions in the Swiss franc
However, when trading the CHF, especially against the EUR, it is important to keep in mind that Switzerland exports a lot of its products into Europe. Hence, the SNB regularly intervenes in its currency market to keep the CHF rate at a reasonable level against the Euro, so that its goods don’t become too expensive for the foreign importers. This is the main risk when trading the CHF, and something to always keep an eye on when trading this currency.