The fiscal woes of the euro zone have been well chronicled in recent weeks, with each crisis of confidence sending the common currency to new lows against the U.S. dollar. But as the turmoil in Europe has bubbled over, currencies around the globe have felt the pinch, the result of a wave of risk aversion washing over financial markets. In uncertain economic times, investors tend to seek out safe haven investments–low and even negative beta asset classes that serve as a desirable location for riding out the storm (see Five Safe Haven ETFs). In addition to gold bullion, the U.S. dollar is one of the most popular safe havens, generally rising in unison with economic turbulence. So the events of the last month have led to a steady rise in the greenback not only against the euro, but relative to everything from the Aussie dollar to Polish zloty.
The euro’s struggles have also presented challenges for European central banks in countries that haven’t adopted the common currency. The Swiss National Bank has made a monumental effort in recent months to prevent the Swiss franc from appreciating rapidly against the euro, causing the country’s foreign reserves to climb to the equivalent of 232 billion francs at the end of May. That’s an increase of more than 100% from just five months earlier; at the end of last year, the reserves stood at about 100 billion. “As a proportion of national output, Swiss reserves are around the same size as China’s,” writes Deborah Ball. “As a result, the central bank now has a large exposure to the flailing euro.”
Signaling a significant policy shift, SNB Chairman Philipp Hildebrand announced this week that the bank would step back from its aggressive currency market intervention. The announcement caused the euro to drop about 1% against the franc immediately, and some analysts think bigger declines are ahead. Switzerland has managed to avoid the dire fiscal straits in which its euro zone neighbors now find themselves. The country boasts a government budget surplus and unemployment recently fell below 4%. The central bank is now expecting GDP growth of 2% this year, better than previous estimates.
This sharp contrast to the euro zone–where unemployment runs as high as 20% and cash-strapped governments are pushing through tough austerity measures–has sent investors fleeing to the franc, which has taken on the “hard currency” role once filled by Germany’s Deutsche mark. However, Switzerland’s relative economic success presents some challenges as well; because the economy depends heavily on foreign trade, an appreciating franc has the potential to cripple the export industry.
Swiss Franc ETF In Focus
For investors looking to establish exposure to the Swiss franc, the best ETF option is the CurrencyShares Swiss Franc Trust (FXF). This currency grantor trust is designed to track the price of the Swiss franc relative to the U.S. dollar. While this relationship may not be tested as strenuously as the EUR/CHF exchange rate, the bank’s recent decision could allow the Swiss currency to reclaim ground lost against the greenback this year. Even after rallying over the last month–FXF is up about 3.5% over the past four weeks–the fund is down almost 7% on the year.
Although the fundamentals underlying the respective economies would certainly seem to point towards a franc appreciation, some investors wonder how long the Swiss government will stay on the sidelines. If the currency heads sharply higher in coming weeks, a return of more proactive policies to hold down the franc could return.
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Disclosure: No positions at time of writing.