Swiss franc strength attributed to ‘absolutely no liquidity

Dramatically reduced liquidity in August, coupled with sovereign debt concerns in the eurozone, have combined to strengthen the Swiss franc, say strategists

The seemingly unstoppable strengthening of the Swiss franc, which saw €/Sfr reach a record low of 1.01 on August 9 and $/Sfr dip to 0.71 on the same day, should be attributed to reduced liquidity during August and the ongoing effects of the European sovereign debt crisis, according to currency strategists.

“The speed at which the Swiss franc has strengthened is partly due to the fact there is absolutely no liquidity in the market at the moment. It is summer, and a lot of people are away. If there is any sort of big trade in the market, it takes out another couple of big figures. Last week we had €/Sfr at 1.11 on Monday, and on Tuesday afternoon it was at 1.04,” says Chris Walker, foreign exchange strategist at UBS in London.

“The franc is considered a safe-haven currency that benefits when there is turmoil in the markets. The Swiss economy has an increasing trading surplus that strengthens its currency, and it has a very low debt-to-GDP ratio, which means its economy is less dependent on the willingness of investors to function,” says Alejandro Zambrano, market strategist with FXCM in London.

Following the Swiss franc’s record strength early last week, the Swiss National Bank (SNB) took further measures to weaken the currency on August 10, announcing it would increase the supply of liquidity to the Swiss franc money market and conduct forex swap transactions in an effort to boost liquidity – a tool not used since 2008. Both €/Sfr and $/Sfr rebounded in response, reaching 1.10 and 0.77 respectively on August 12.

“Political support is building for a form of currency target for €/Sfr. There are of course several structural issues with this, and the SNB will have the final say as to whether this will happen, and indeed what level they would target. Swiss exporters are suffering, and only a target of around 1.20 or above would really help them. Investors clearly do not want to be caught short on this sort of development in €/Sfr and the strong rally back up to 1.10 illustrates how extreme the current levels are,” says Walker.

Discussing the SNB intervention in a strategy note published on August 12, Simon Smith, chief economist at FxPro, suggests more drastic measures under discussion, such as pegging the Swiss franc to the euro, could have a more dramatic effect in weakening the currency.

“SNB deputy president Thomas Jordan suggested the possibility of pegging the Swiss franc to the euro. This is not to say it is something that is being contemplated, but nevertheless, when combined with the fact that liquidity injections could be increased further, it was sufficient to scare Swiss franc longs,” he says.

 

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