Swiss Franc: upside promise with an unlikely downside

FACED with a dire Eurozone crisis back in 2011, investors turned to what they believed to be a reliable store of value: the Swiss Franc. With a longstanding reputation for financial stability, the Franc has always held the status of a safe haven asset. As investors ploughed their funds into the currency, the resulting consequence was a Swiss Franc that quickly ballooned in worth against its Euro counterpart.

However, with 70 per cent of its GDP dependent on exports, the appreciating Franc made for an unfavourable economic reality. In an attempt to normalise the EUR/CHF exchange rate, the Swiss National Bank (SNB) declared a price floor of 1.20 Francs per Euro, defending the peg through the purchase of foreign currencies.

Fast forward 3 years and the economic situation surrounding the Eurozone continues to deteriorate. In its commitment to maintaining the EUR/CHF peg, the SNB has amassed foreign currency reserves worth over 500 billion Francs (S$714 billion). As efforts to reinvigorate the Eurozone intensify, the European Central Bank pushes proposals on a massive stimulus initiative. Should the ECB's Quantitative Easing programme come to pass, the SNB's policy of a currency peg will become increasingly expensive to pursue. Its large cash hoard of foreign reserves will also see a steep cut in value. The costs to retain control over the Swiss Franc's exchange rate are undoubtedly high.

On Jan 15, 2015, in a surprise decision the SNB announced an abandonment of the EUR/CHF currency peg. The following 30 per cent spike against the Euro rippled through the financial markets. Today the Swiss Franc remains at overvalued levels, with the export driven economy feeling the strain of uncompetitive pricing.

Swiss GDP shrank 0.2 per cent over the first 3 months of the year. With worries in Greece prompting a flight to safety, it appears the Swiss Franc is back where it began in 2011.

However, the economic landscape has since changed. With steady US interest rate hikes a possibility, the Franc's negative interest rate of -0.75 per cent hardly makes it an investor's safe haven currency of choice. Coupled with SNB chairman Jordan's continual cautions of currency intervention, the long USD/CHF position is one that may hold upside promise with an unlikely downside.