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Many traders were surprised when they crunched the numbers and learned that the Swissy outperformed last week. What would probably surprise even more traders is that the Swissy is now the third best-performing currency of the year (so far). And if the pound continues to weaken against the Swissy, then the Swissy could even become the second best-performing currency of the year.

Overlay of CHF pairs (year-to-date): 4-Hour Chart
Overlay of CHF pairs (year-to-date): 4-Hour Chart

So, what’s up with the Swissy lately? Why is it trending broadly higher (except against the euro)? Well, here are the likely reasons for the Swissy’s recent ninja-like strength that nobody seems to be talking about.

EUR & CHF Correlation

Regular readers of Pip Diddy’s weekly recaps were probably not too surprised that the Swissy had a good run last week.

After all, Pip Diddy has been pointing out that the Swissy appears to be tracking the stronger euro since his recap for the April 24-28 trading week.

However, zooming out to see the bigger picture reveals that the positive correlation between the euro and the Swissy actually began to return last year. And this year, that correlation has actually tightened, as you can see in the sample pairs below.

EUR/USD (red) vs. USD/CHF (black, inverted): 4-Hour Chart
EUR/USD (red) vs. USD/CHF (black, inverted): 4-Hour Chart
EUR/GBP (red) vs. GBP/CHF (black, inverted): 4-Hour Chart
EUR/GBP (red) vs. GBP/CHF (black, inverted): 4-Hour Chart
EUR/JPY (red) vs. CHF/JPY (black): 4-Hour Chart
EUR/JPY (red) vs. CHF/JPY (black): 4-Hour Chart

And as a refresher, the euro and the Swissy’s correlation got messed up after the SNB removed the peg on EUR/CHF two years ago, which caused the Swissy to appreciate tremendously across the board. And since then, the SNB has been actively intervening in the forex market to try and weaken the Swissy by primarily targeting USD/CHF and EUR/CHF to try and depress the Swissy’s overall strength, which further messed up the correlation between the euro and the Swissy.

But as mentioned earlier, the euro and the Swissy began to show signs of correlation last year. And this year, it looks like the Swissy is behaving just like it used to before the SNB removed the peg on EUR/CHF.

And since the euro broadly strengthened this year and is now even the best-performing currency of the year (so far), thanks to easing political uncertainty and improving economic conditions in the Euro Zone (as well as speculation that the ECB may become a bit more hawkish), it also follows that the Swissy would perform well, given the positive correlation between the euro and the Swissy.

Overlay of EUR pairs (year-to-date): 4-Hour Chart
Overlay of EUR pairs (year-to-date): 4-Hour Chart

As to why the euro and the Swissy used to be positively correlated, that’s because of Switzerland’s close economic links to the Euro Zone, mainly through trade. As such, improving economic conditions in the Euro Zone would mean potentially stronger demand for Swiss goods. Well, that was the common wisdom back then, although that still likely applies now.

SNB shenanigans

SNB’s Big, Bad, Boss-man Thomas Jordan uses practically every SNB monetary policy statement, presser, interview, speech, etc. to say that the Swissy is “still significantly overvalued” and then threaten that the SNB will “remain active in the foreign exchange market as necessary.” It’s basically a well-known mantra by now.

However, a look at the SNB’s foreign currency “investments” shows that the SNB unloaded some of its euro holdings in Q1 2017. That’s rather interesting, isn’t it?

SNB's Foreign Currency "Investments"
SNB’s Foreign Currency “Investments”

The SNB has unloaded its euro holdings before, but only to add even more later, though. In Q1 2016, for example, the SNB unloaded some of its euros, likely because of profit-taking because of the euro’s strength at the time, thanks to unwinding by euro shorts after the ECB stepped up its monetary policy easing during the December 2015 ECB statement.

And as a refresher, the euro was sliding ever lower ahead of the December ECB statement because Draghi and friends announced several months ahead that the ECB will do “whatever it takes” to boost growth and inflation. However, the additional stimulus was less than expected, so euro shorts decided to take their profits and run, causing the euro to strengthen.

Anyhow, this time the situation is a bit different because the euro has been trending higher due to improving fundamentals (although speculation is also in play), and not just due to unwinding by euro shorts.

The main point here is that there’s a good chance that the euro’s strength would be more sustainable, especially if overall fundamentals continue to improve and problems, such as Greece and Italy’s banks, are kept in check.

What will the SNB do in this situation? Keep adding to their euro “investments” to keep pressure on the Swissy, or begin unloading and set the Swissy free? I guess we’ll know when the data for the SNB’s Q2 foreign currency investments come out.

JPY’s “instability” as safe-haven

In last week’s write-up about the yen’s recent strength, I also noted that the yen actually weakened in mid-April, very likely because of jitters related to the North Korean situation, which made the yen’s safe-haven status “extremely unstable” to quote Japanese Finance Minister Taro Aso.

And it looks like the Swissy stepped up to the plate and took the yen’s place as the premier safe-haven currency, although it looks like the yen has regained its mojo recently, as can be seen from last week’s price action.

Still, it looks like the Swissy is acting as a safe-haven again. But how long will this continue? Will the SNB try to curb the Swissy’s strength again? In any case, things could potentially remain interesting for the Swissy.