The Swiss Franc Still Trumps the Dollar and the Euro (FXF)
Last week, I wrote a little about the Swiss franc’s historical strength against the dollar and the euro. I made a prediction that went a little something like this: “However, if you’re using the Swiss franc as a safe harbor, it might not be the perpetual gift that keeps on giving. Because of its historic strength against the dollar and euro, the Swiss cabinet is on the lookout for a possible economic slowdown in the next 12 months. The cabinet stated that the franc is in an over-valued phase.”
I gave the Swiss National Bank up to a year to cut rates. It turned out that all I needed was a day.
On August 3, the Swiss National Bank announced it was cutting interest rates and threatened to take further action – if need be – to cap a soaring Swiss franc. It followed up by stating that it would cut its target rate to as close to zero as possible.
The target rate was currently at a drastically low .25 percent. The Swiss National Bank said it would dramatically increase the supply of francs to the money market in days.
Economic Soundness vs. Dysfunctional Politics
The Swiss National Bank is very weary of the effective tightening of the monetary environment, which it feels was forced upon them due to an extremely overvalued franc. Its strength against the euro and the dollar was thought to possibly threaten economic growth and increase downside risks to price stability.
So is it time for a sell-off? Not even close.
All the gains that the euro made against the franc were gone by the close of business last Wednesday. The problem with the franc is its country’s economic soundness versus a dysfunctional U.S. political system and a European Union where a new member faces bankruptcy weekly.
As news of a possible U.S. credit rating downgrade and fear of Italian default came about last week, the rate decrease seemed necessary.
In the short term, I still believe this to be a safe bet. And, within a year you might want to reassess the world’s political climate. I believe the Swiss National Bank will use monetary policy to periodically weaken the franc to keep Swiss consumers from running across the border to buy goods in the Eurozone and keep their unemployment rate under three percent. Once again, I’ll repeat last week’s play:
“One of the easiest ways to invest in the Swiss franc is through the CurrencyShares Swiss Franc Trust (NYSE:FXF). The main purpose of the trust is to track the currency in a way that reflects having a money market account denominated in Swiss francs – and that includes interest.
It just so happens that in the present, you don’t receive any interest from the Swiss franc, given the unpredictability of the post-downgrade world, U.S. investors will probably be able to earn higher yields.”