In spite of growing recessionary fears over the growing global trade war and Brexit, the Swiss franc – traditionally a safe-haven currency – has been descending against the greenback.
This is particularly surprising given the Federal Reserve’s recent decision to cut rates for the second time this year in September. Nevertheless, the dollar has continued to maintain its strength and the Swiss franc has been edging lower as a result.
What is driving the depreciation in the Swiss franc, and is there a case to be made for a potential rebound?
Recently, the news that Polish homebuyers who took out mortgages in Swiss francs could now convert these to zloty-denominated mortgages, as well as expectations that the Swiss National Bank will intervene with further quantitative easing has placed downward pressure on the franc.
From an economic standpoint, Switzerland is feeling the pinch. A drop in manufacturing has led the country’s leading economic index to its lowest level since early 2015 when Switzerland chose to remove the cap on the euro.
Moreover, exports have also taken a hit since May of this year as a result of low growth in wider Europe.
In spite of these pressures, there could be a case for a rebound to the 1.03 level seen in September. We can see that the Swiss franc and Japanese yen (both considered safe-haven currencies) have dropped against the greenback over this period.
In spite of recent rate cuts, the U.S. dollar has been remaining strong as a result of its perceived role as a safe haven. That said, should we see economic concerns relating to U.S. growth prospects deepen, then it is likely that any drop in the greenback would lead to renewed demand for the traditional safe-haven currencies such as the franc. This trend could particularly accelerate should we see underperformance on the U.S. jobs front continue.
The CHF/USD has taken a dip of late, but I am not convinced that the U.S. dollar will continue to retain its safe-haven status should economic conditions worsen. I take the view that the CHF/USD will rebound to the 1.03 level in the next couple of months.
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