CHF: No longer a traditional safe haven – TDS

Mazen Issa, Senior FX Strategist at TDS, suggests that the CHF has typically been revered for its perceived stability (both politically and economically) but in the context of the recent past, the Brexit shock has likely challenged this narrative.

Key Quotes

“Currency intervention is a policy, not a threat: Even though the SNB abandoned the EURCHF floor last January, the central bank has repeatedly intervened to stabilize the currency. Indeed, the SNB has demonstrated that it is willing to pursue this policy further by already intervening immediately after the Brexit vote.

Once bitten, twice shy: The carnage that followed the abandonment of the EURCHF 1.20 floor has kept investors from dipping their toes back in. Though Switzerland runs a current account surplus, its basic balance of payments is mixed. Indeed, the composition of the BBoP is what matters, we think. Portfolio inflows have slid and for the first time since 2014Q4, net debt flows are net negative since the SNB surprise.

Contagion effect: The Swiss economy remains highly leveraged to its banking sector. More troubling is that the Swiss have one of the highest direct exposures to the UK banking system. Trade linkages are also moderately deeper than most across the EZ making the Swiss economy, and thus, the CHF more vulnerable to downside risks. Interestingly, Japan is least-directly exposed.

Capital preservation: The SNB is among several central banks experimenting with NIRP. The jury is out on its efficacy as a viable policy option. While the SNB’s negative rate policy is not typically the focal point of skepticism (this is one that has been typically reserved for the ECB, but more intensely on the BoJ), it is a concern that we have long shared pre-Brexit and one that will remain post as central banking looks to have reached its limits. From a capital preservation point of view, there is less appeal to invest in a negative yielding asset. Indeed, we estimate that roughly 40% of the G10 sovereign bond curve yields negative, with the Swiss curve negative throughout the entire maturity structure.”