Swiss Franc the New Reserve Currency?

In times of uncertainty, nervous investors historically tend to gravitate towards the CHF and JPY. Today, the CHF printed an all time high against the dollar (0.7990) on the back of Euro-contagion concerns and the US debt ceiling impasse.

From a portfolio perspective, it’s expensive to have all your ‘eggs in one basket’. The Swiss fundamentally have their own issues. This week’s KOF Economic Barometer or leading indicators, came in softer than expected, which should have been negative for the currency, however, with the market being so nervous, the currency is unlikely to see much near term relief.

The market is also propping up the currency as the Swiss government is finding it difficult to recycle their current account surplus. The SNB are not even comfortable with the idea of being a reserve currency. They have proven that intervention has not worked.

There is no single currency that can be considered as a reserve currency. Preferably, it would be better to be looking at a bucket of currencies for reserve purposes. This bucket should be composed of the antipodean pair, AUD and KIWI, as well as the CHF and CAD. Apart from the CHF, all the others are growth and commodity sensitive currencies whose Central Banks are leaning towards a tightening environment or widening rate differentials.

Yesterday, the Reserve Bank of New Zealand kept rates on hold as widely expected (2.50%), but the policy statement signaled that the central bank stands ready to remove March’s-50bp cut post Christchurch earthquake. Futures traders are beginning to price in a +50bp hike in September rather than October.

The CAD is heading for a second straight monthly gain as the market is predicting that tomorrow’s GDP print will show that output expanded in May. The loonie is wearing the ‘safer heaven’ hat as investors push the currency towards its four-year high. There is good appetite from reserve managers to diversify away from the USD and the EUR, providing support for the CAD. Currently, there is interest in buying the loonie on any US dollar rally, which is a spillover from the somewhat hawkish tone from Governor Carney last week.

Also this week, the AUD vaulted to a post-float high (1983) after the market digested a higher than expected second-quarter inflation print midweek (core-CPI rose by +0.9% on the quarter and +3.6% on the year). With Australia inflation surprised higher, it points to a rate hike (4.75%), rather than a cut that had previously been priced in, and a blow to the doves.

Coupled with ongoing dollar negativity, around US politicians’ inability to strike a deal before next Tuesday and the stronger than expected inflation figures means, Aussie buying dip theory remains in vogue.

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