The USD/CHF is down around 10% since the peak of the Coronavirus in mid-March, as further dollar weakness continues to increase the value of the safe haven, the Swiss Franc.
This recent strength in the Swiss Franc has broken a strong range the USD/CHF has been trading in for the past couple of years, between 0.95 and 1.05. It has ranged between these points after the Swiss National Bank decided to stop pegging the Swiss Franc against the Euro unexpectedly in 2015. We saw the pair break a strong support level around 0.934, a 78.6% Fib retracement level.
Historically post peg, the pair has been trading in relative parity to each other, highlighting the battle between the demand for the world's reserve currency alongside the demand for a safe haven such as the Swiss Franc. However, U.S. dollar weakness has strengthened many currencies opposite to it, including the Swiss Franc.
A couple of months ago, the Swiss National Bank intervened in the currency market to cap the Swiss Franc's appreciation, with Credit Suisse estimated that the Swiss National Bank had sold over $98 Billion in Swiss Franc's in the first half of this year alone. The Swiss National Bank believes that the Franc's appreciation would be detrimental to the economic recovery in Switzerland. The SNB's balance sheet is around $1 Trillion, with their foreign reserves at an all-time high. For reference, Switzerland's economic output is about 700 Billion.
Dollar weakness is the key to the strength of the Swiss Franc, and that dollar weakness is coming from the global economic recovery from the Coronavirus. If the vaccine rollout successful in the U.K. and then across the world, dollar weakness will continue to push the Swiss Franc stronger and further away from parity.USD/CHF approaching 0.89, a healthy resistance level
We saw a retest of the 0.92 mark in early September when the Swiss Franc against the U.S. Dollar rallied as investors embraced the currency's safe-haven status. Will we see a further strengthening of the Swiss Franc?
In 2011, the Swiss National Bank pegged the Swiss Franc at 1.20 against the Euro as investors and traders holding the Euro flocked to the Swiss Franc. The shift in sentiment was due to the European Debt Crisis, where major countries in the European Union, such as Greece, Spain, Portugal, and Ireland, could not pay/refinance their government debt. To control the appreciation from investors and traders flocking to the Swiss Franc due to the Swiss Government's stability, they pegged the Swiss Franc to the Euro. An appreciation in the Swiss Franc made their exports more expensive.
However, the SNB unexpectedly removed the peg in 2015, causing the Swiss Franc to rally against the Euro and the Dollar. Since then, the SNB has been trying to control its currency appreciation via negative interest rates and quantitative easing.
As we head into a volatile period, investors and traders may want to look at safe havens to preserve capital alongside potential moves to the upside. The Swiss Franc has seen this pressure as a safe haven from traders recently, as it retested that 0.92 mark. In a period where exports are critical to a better recovery from the Coronavirus, an appreciation of a currency would not be wanted. That's why the SNB has spent around $98 Billion USD to try and control the appreciation. However, the Swiss Franc has still appreciated around 5.7% year to date.
However, that key point above, where exports from Switzerland get more expensive, is the exact reason why traders and investors are betting on appreciation – it puts less attention on Switzerland as it is less of a threat to the United States. For example, President Donald Trump has targeted China and the European Union due to them lowering interest rates, weakening their currency, and boosting their exports. The initial peg in 2011-2015 and the appreciation from 2015 when the peg was disabled saw Switzerland be put on the U.S. Treasury's watchlist as a currency manipulator. However, an appreciation of the Swiss Franc against the U.S. dollar may alleviate the supposed threat against the United States' exports. As Peter Kinsella, Global head of foreign exchange strategy at Union Bancaire Privee, "The U.S. administration possibly has bigger fish to fry."