The Swiss franc is back to being a haven from market turmoil.
Once again, the currency is climbing when Greek bonds -- the riskiest government debt in the developed world as measured by derivatives -- fall and weakening as the securities rise. Switzerland upended the relationship in January when it unexpectedly ditched its policy of keeping the franc weaker than 1.2 per euro, compromising its reputation for stability.
That dependability is re-establishing itself as traders become confident Switzerland won’t risk damaging its status as one of the world’s most benign economies by repeatedly surprising markets. It’s happening not a minute too soon for investors who are seeking a safe place to park their cash as speculation increases that Greece’s financial system is a few weeks away from running out of cash.
The franc is getting “back to normal, rising when risk aversion is high and falling when it’s low,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen.
The currency has been favored by investors as a haven because Switzerland hasn’t run a trade deficit since 2000, meaning it’s not reliant on foreign investment to fund its budget.
Greece is on the opposite end of the spectrum, with a 75 percent chance of defaulting in the next five years, credit-default swap prices compiled by CMA suggest. Greek 10-year yields rose to the highest this month on Tuesday as the nation struggled to reach a funding agreement before its banks max out their emergency funding lines.
The correlation between the franc-euro rate and Greece’s 10-year bond yield reached 0.7 on Tuesday, almost matching the level before the Swiss National Bank abandoned its exchange-rate cap on Jan. 15. That decision reduced the correlation to 0.3, according to data compiled by Bloomberg.
A figure of 1 would mean the exchange rate was in lockstep with Greek yields, while minus 1 would mean they were moving in opposite directions.
The return of the franc’s reputation for safety has investors snapping up the currency. Bets on its advance against the dollar have climbed to the most in a year, according to the latest data from the Commodity Futures Trading Commission in Washington.
The franc has strengthened more than 3 percent versus Europe’s single currency in the past three months, to 1.04247 per euro as of 7:37 a.m. in New York. That’s down from Jan. 15’s all-time high of 85.17 centimes.
“The franc is still seen as one of the safe-haven currencies of choice, despite the SNB,” said Lee Hardman, a London-based strategist at Bank of Tokyo-Mitsubishi UFJ Ltd., who sees it gaining to 1.03 per euro by year-end. Markets have returned to “the traditional role of the franc benefiting when concerns of a Greek default rise.”
While ditching the cap sent the franc soaring to a record against the euro, it also pushed implied three-month volatility on the currency pair to an all-time high -- based on closing prices -- of 25 percent. That fell back to 8.3 percent on May 14, the lowest since the ceiling was removed.
The currency’s gains have prompted the SNB to take other measures to try to prevent the rally from hurting growth. There’s speculation the SNB has sold francs in global markets and while that hasn’t had much impact on the exchange rate, it’s still led some investors to question whether the franc’s revitalized haven appeal can last.
“If we get a lot of risk aversion and a strong franc, then there would be a danger of a rate cut,” said Nordea’s Christensen, who sees the currency ending the year at 1.05 per euro. “It’s hard to know what the SNB will do.”
Until then, most appear happy to embrace the franc as one of the safest assets in global financial markets -- particularly as investors push back their timeline for U.S. interest-rate increases and Chinese growth falls to the slowest pace since 2009.
Swissquote Bank SA sees the franc appreciating to 1.02 per euro by the end of the year.
“The franc has shrugged off a lot of the interventionist worry that had moved it away from its historical place in the currency world,” said Peter Rosenstreich, the bank’s head of market strategy in Gland, Switzerland. “This is part of a longer-term trend where the Swiss franc is no longer being manipulated by the central bank. It will take on more of the characteristics of its traditional role.”
For more, read this QuickTake: Currency Pegs