Swiss Franc is About To Reverse
Historically, the stability of the franc is caused by the solid Swiss economy and a highly developed banking system. A peg to gold also supports its "safe currency" status. In addition, the inflation rate in the country over the past few years has averaged 0.6%, although, in April 2022, it reached 2.4% amid geopolitical turmoil and rising oil prices. The average inflation rate in the country in 2022 is expected to be 1.8%.
What happened?
Investors believe in the franc's reliability so much that after the start of the war in Ukraine, everybody rushed to buy the franc, which temporarily broke parity with the euro. However, the Swiss Central Bank gave a clear signal: if the franc continues to rise in price, it will intervene in the situation.
Why is it important?
January 15, 2015, will undoubtedly go down in the history of the Swiss franc and the Swiss economy as Black Thursday. On this day, within a couple of minutes, CHF soared by a quarter against EUR and USD.
This whole storm was caused by the Swiss National Bank (SNB) in Bern, which unexpectedly abandoned the policy it had been pursuing since September 2011. Then SNB decided to limit the growing exchange rate of the national currency, deciding that the euro should not fall below 1.20 francs. Since then, the SNB has spent billions of Swiss francs buying euros to defend this frontier.
The essence of the problem is that Switzerland has never aspired to have a reserve currency but de facto has one. The firmness and reliability of the Swiss franc lead to the fact that it is treated all over the world as a "safe haven" and bought up whenever doubts arise in other currencies. In September 2011, in the conditions of the debt crisis that was growing in the eurozone, a massive buying of Swiss francs began.
The high demand for the currency of a small country like Switzerland inevitably leads to an unnaturally high exchange rate, damaging the economy, which is entirely focused on exports and inbound tourism. After all, the more expensive the franc, the higher the prices for Swiss engineering products, watches, or chocolate, and the fewer foreigners can afford to visit this country.
Will the situation repeat?
We doubt. In 2015, the US Federal Reserve was shrinking the policy of ultra-cheap money and preparing to raise interest rates. At the same time, the European Central Bank was pumping up the unstable Eurozone economy with cheap money. Moreover, the ECB was about to announce new stimulating measures, which could cause further depreciation of the European currency.
As of today, the Federal Reserve has already increased the rate, and the European Central Bank is about to do the same. The Swiss National Bank doesn't need to buy millions of euros to hold EURCHF currency pair above 1.00. Moreover, the inflation rate in Switzerland is barely above the target of 2.2%, which allows the Swiss National Bank easily control the strengthens of the national currency using such instruments as key rate decreases, stimulus packages and currency sell-off.
Technical analysis
EURCHF, monthly chart
The pair is trading in the falling wedge, which is technically a bearish pattern. The Swiss National Bank gave the strongest hint it would not allow the pair to plunge below 1.00. That’s why we suggest placing limited BUY orders right above this support level and waiting for the upcoming reversal.
USDCHF, monthly chart
It also looks like the USDCHF pair has found its global support level at 0.8000. Currently, the price is heading towards the 200-month moving average, where a pullback might happen. However, the main resistance remains at 1.1080. Breakout of this level will set a new global solid uptrend for this pair.
Conclusion
The world is changing at its time to admit it. The Japanese yen has already proved old trends can get broken. It looks like the Swiss Franc is the next currency to lose its safe haven status.