The Swiss Franc could be setting up for a big rally, here’s why
In a night of quiet,
directionless trading marked by downward revision of UK GDP, the most
interesting economic release of the night came out of Switzerland
where the KOF index of leading indicators printed at 77 versus expectations of
70 — the best value in over 12 months. As we’ve noted in the past, tiny
Switzerland has been the hidden growth story on the European continent as its’
export skewed economy has been the primary beneficiary of lower exchange rates.
Within the past month Switzerland saw both Retail
Sales and Unemployment data surprise to the upside suggesting that the economic
recovery in the country is strengthening despite the depressive effects of
higher energy prices. Finally, this past Sunday the Swiss voted in favor of
extending a labor accord with the European Union – a move market deemed critical
to future trade growth between Switzerland and the Euro-zone. The currency
however, much like Rodney Dangerfield, has gotten no respect for the past two
weeks, falling against both the dollar and the euro. The recent decline in the
Swissie can be directly linked to the use of the franc as the key funding
currency for carry trades. With its miniscule 75bp yield, the franc is second
only to the yen in offering the lowest interest rate amongst the majors. Though,
that dynamic might change in the near future as officials from the SNB have
hinted that Swiss rates may rise if the economy continues to grow. Should that
occur, a major change in sentiment may finally benefit the currency. In the
meantime we believe that traders will find Swissie attractive against the euro
as a stark contrast of both steady economic progress and political stability.
Turning briefly to Japan, we note that today’s
Small Business Confidence Indicator registered an increase of 50.4 from 48.8 —
the first time it rose above the 50 boom/bust level since July of 2004. The news
augurs well for the Japanese economy as confidence is now spreading through the
full spectrum of Japanese society. Nevertheless, the yen, much like the franc
has been the victim of carry flows and until market sentiment begins to focus on
dollar’s problems the weakness in the unit is likely to continue.
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.