CHF: Currency Index & Volatility

Relative Currency Strength

The Swiss Franc was one out of four losers during the last five trading days, with CHF index posting a 0.68% drop. At the same time, other currencies that are considered as safe-haven, including the Yen, Aussie and kiwi, posted solid gains. The Yen soared 1.7% over the period, as together with risk-on sentiment, comments from the Bank of Japan diminished hopes for fresh stimulus soon, resulting in a strong interest in the Yen. Moreover, the currency is likely to appreciate further, as weak labour data from the United States dragged the USD 0.55% lower, while boost the Bank of Japan is unlikely to be short-lived. The single currency was steadily depreciating over the observed period following ECB’s meeting.

Refreshed Ukraine tensions were the main reason why investors looked forward a less riskier asset during the last five trading days. Swiss Franc is considered to be one the most attractive currencies for investors when the risk-on sentiment prevails the market. Nonetheless, hawkish RBA and RBNZ as well as confident speech from BoJ’s Kuroda, made other safe-haven assets more attractive than the Alpine country’s currency. Even positive fundamentals from Switzerland were not able to change the sentiment. The CHF index never moved into the positive territory over the described period, suggesting even stronger-than-expected inflation, foreign currency reserves and retail sales has modest impact on financial markets.

Volatility

Even an abundance of important economic releases and central bank’s comments were not able to provide a significant boost to markets, with elevated market volatility recorded only in 19% of the time. The main reason for such a calm session was a lack of data this Monday and Tuesday, with only the BoJ’s meeting having a significant impact on markets. Remarkable that the most traded currency pair was the least volatile even despite Mario Draghi’s hints about the possible implementation of the U.S.-style quantitative easing. In contrast, the USD/JPY pair was the most volatile, with the elevated volatility being in seen in 37% of the observed period. BoJ’s Governor’s Kuroda’s confidence dragged attention to the Yen, with the pair plunging to 101.55.

Regarding the USD/CHF pair, its volatility was higher than the average market’s volatility, even though the pair finished the period practically at the same level where it was changing hands on April 2. The pair was appreciating in the first half of the period, as markets were preparing for a positive unemployment data from the United States, while later, disappointing figures provoked a massive sell-off the U.S. currency. Despite the fact the overall jobless rate remained unchanged in March, non-farm payrolls surprised markets to the downside, suggesting the economy was still suffering from bad weather. Friday’s data together with the ECB’s press conference resulted in a two massive spikes in USD/CHF’s volatility. USD/CHF volatility hit 3.38 after Draghi, while unemployment data managed to push the pair to 2.89.

Currency Significance

Ahead of the ECB’s minimum bid rate announcement and the press conference, where policymakers finally made a bold statement, the level of CHF significance was declining, with the average correlation coefficient hitting 0.17 on April 3. However, later, hints about the consideration of implementation the quantitative easing pushed the average correlation coefficient rocketed to 0.71, hitting the highest over the period. In case the ECB starts injecting billions of euros in the struggling economy, the single currency will head to the south, while investors will seek for a safe-haven currency, the Swiss Franc most likely. It means, the SNB will feel more pressure and will have to intervene markets to defend the 1.20 cap.

The increase in market’s interest towards the Swiss Franc was short-lived, as soon after the announcement the average correlation coefficient began turning lower. During the last several months the main headache for the Swiss National Bank was sluggish growth in consumer prices. Therefore, markets focused on the CPI report on Monday, April 7. The data came stronger-than-expected both on the monthly and yearly basis, while foreign currency reserves surprised markets to the upside as well. A pickup in inflation means that the economy is recovering after a recent slowdown, and in theory, positive figures should be highly welcomed by markets. The correlation coefficient, however, remained almost unchanged, staying around 0.57. Additionally, the short-term correlation between USD/CHF and other crosses increased.