Over the past few months, the Swiss franc has attracted considerable interest from traders and long term investors alike as concerns continue to mount over other major currencies such as the dollar and the euro. Thanks to this, the value of the franc has surged against the euro, up to all-time high levels. While many nations might welcome an increase in the value of their currencies, tiny Switzerland, which is surrounded on all sides by euro zone members, becomes increasingly uncompetitive when this happens, putting the fragile recovery taking place in the nation in jeopardy. As a result, the country’s central bank, the Swiss National Bank, has stepped up the rhetoric for interventions threatening to implement a peg of the currency against the euro for the foreseeable future. While many thought that this was just the bank blowing some hot air attempting to talk down the exchange rate, recent moves suggest that the SNB is extremely serious about capping the rise of the franc against the currencies of the nation’s major trading partners.
In one of the most direct and confident statements issued by a central bank in quite sometime, the SNB declared that it was ‘aiming for a substantial and sustained weakening of the Swiss franc’ pronouncing that it will ‘no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20′. Additionally, in the press release the bank also said that it would ‘buy foreign currency in unlimited quantities’ in order to defend the peg and keep the franc at the key 1.20 level [see The Top Three Currency ETFs of 2011].
With this sudden statement, investors immediately fled for the exits in the Swiss franc pushing the currency down by close to 10% against major currencies such as the dollar and the euro, helping to erase much of the franc’s appreciation in recent months. Yet, with that being said, it will certainly be a difficult task in order to keep the peg stable, especially if turmoil continues in the euro and that currency loses even more of its luster in the medium term. PIIGS countries are swimming in debt and with one year Greek government bonds approaching yields of 90%, a default or more extensive bailout measures will undoubtedly be required before the year is out.
As a result, the SNB’s 2010 calendar year loss of $21 billion could easily be outdone by this year, especially if the peg becomes increasingly difficult to maintain. “In circumstances of a continued crisis in the euro-zone, we believe that the SNB may be required to purchase foreign currency of between $500 billion and $1 trillion,” Derek Halpenny, European head of currency research at Bank of Tokyo- Misubishi UFJ Ltd. in London, wrote to clients, suggesting that tiny Switzerland may have its hands full in this latest move by the SNB [Switzerland ETF: Exposure To Europe's Bright Spot].
Thanks to this news, the main ETF that tracks the Swiss franc and its price movements against the dollar, the CurrencyShares Swiss Franc Trust (FXF), plunged by a historic amount in the session, falling by close to double digits at one point only to end the day down 8.3%. The move also was on incredibly high levels of volume as more than 1.4 million shares of FXF changed hands, more than double the trailing three month average of 600,000 [see more on FXF's fundamentals page].
The shift also makes FXF pretty much entirely dependent on the euro zone for its risk return profile, dramatically changing the role of this fund in investors’ portfolios as a safe haven asset. Now, FXF represents one of many national currencies that could get sucked into further turmoil in the euro, especially in the short-term. As a result, investors who have a long-term position in FXF would be very wise to quickly reevaluate their holding in the fund and consider looking for other safe havens in the currency market or perhaps taking a closer inspection of precious metals once again [see charts of FXF here].
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Disclosure: No positions at time of writing.