Stay long the Swiss franc

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The Swiss franc has been in a strong uptrend since June last year, and rose in parabolic fashion during the first two weeks of August this year as safe haven concerns channelled massive flows into the Swissie. This has prompted the Swiss authorities to try to stop the franc from appreciating. Will they succeed? A research note from BCA Research casts some light on this question, as reported below.

“Last week, the Swiss National Bank (SNB) announced a further CHF40 billion liquidity measure and SNB Vice President Jordan said it would be legal to peg the Swiss franc to the euro. The view of our Foreign Exchange Strategy remains unchanged. Europe’s debt crisis is leading to heavy capital flows into the Swiss franc as a safe haven.

“The eurozone has a population of 330 million versus Switzerland’s 8 million. The influx of foreign money is simply overwhelming the tiny Swiss economy. Last year’s CHF115 billion expansion in the SNB’s balance sheet could not weaken the franc. The latest liquidity provisions may also fail.

“Paradoxically, stabilizing the franc versus the euro could cause greater instability in the Swiss economy. That was the lesson of the late 1970s. Unsterilized intervention led to an explosion in Swiss money supply, which fueled an inflationary boom. This was followed by an inevitable bust. The ‘cure’ may do more damage to the economy than the ‘disease’ of currency strength.”

The report concludes by advising investors to stay long the franc.

Source: BCA Research – Daily Insights Service, August 16, 2011.

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