CHF: Currency Index & Volatility

Relative Currency Strength

On June 18 the National Institute of Economic Research said that Sweden’s central bank will be forces to cut interest rates again later this year amid risks of deflation in the largest Nordic country. Dovish comments pushed the Swedish Krone lower, resulting in a 1.67% loss over the observed period, and adding to earlier losses. The Riksbank will lower rates further, as economic growth for 2014 was cut to 2.2%, while unemployment is likely to hold at 8.1%. In contrast, the Canadian Dollar posted the most impressive gains, with CAD index adding 1.07%. The currency was supported by the upbeat inflation figures, with consumer prices hitting 2.3% in May, the first time in more than two years the CPI moved above the 2% level.

The Swiss Franc was the second best-performing currency over the last five trading days, climbing 0.48%. The currency added 1.88% over the last 250 trading days, as it was under the pressure from investors who were looking for a safe-haven investment. Over the last several months the interest for the Franc began to wane, and the CHF index lost 1.34%. Nevertheless, more gains are on the radar, as the ECB is loosening its monetary policy amid renewed concerns about deflation and slowing growth. What is more important, over the last five trading days, the Swiss Franc outperformed the single currency, which posted a 0.29% gain on the back of Dollar’s weakness.

Volatility

USD/CHF volatility index hit the highest level on Wednesday, June 18, as the FOMC decided to proceed with the tapering of the stimulus programme even despite worrying signs from the world’s largest economy. The volatility index hit 2.39. A day later, policymakers in Switzerland in a highly-anticipated move decided to keep its cap on the Swiss Franc, citing the significant pressure on the Franc, as the ECB added more stimuli several weeks ago. However, it was not an ordinary meeting, as the SNB admitted there is a progress by the country's largest banks, however, also warned more needs to be done in order to assure future financial stability. The statement had little to do with the exchange rate, hence USD/CHF volatility index jumped only to 1.66.

The USD/CHF currency pair once again proved to be driven by U.S. fundamentals, while statistics from the Alpine country had muted impact on the pair. However, it is also worth mentioning that overall market volatility was very subdued, with the volatility index trading in the turbulence zone for only 20% of the time – significantly below the average value. At the same time, the most remarkable performance was observed on the USD/SEK currency pair, as pair’s volatility entered turbulence zone in 43% of the time. On the contrary, major pairs like EUR/USD, USD/JPY, EUR/JPY and EUR/GBP were very calm, as a lack of economic reports and anticipations of July’s first week, which is full of important economic releases, lowered investors’ interest.

Currency Significance

The first significant boost was a result of the SNB’s press conference, where central bank called for further improvement of banks’ capital positions. The average correlation coefficient soared above 0.50-mark, and, what is more important, the reaction was not short-lived, as during next four hours the indicator remained almost unchanged. On Friday, June 20, all of these gains, however, were erased, as market’s focus switched to Canada’s inflation data that came stronger than expected. A combination of Swiss trade balance and German Ifo Business Climate provided another strong boost to the correlation coefficient, pushing the indicator to its highest level over the period at 0.57.

Keeping in mind the fact the USD/CHF currency pair was mostly driven by data from the U.S., the average correlation coefficient could have fluctuated around the same level over the observed period. Nevertheless, SNB’s meeting, as well as trade balance for May, managed to boost Franc’s significance, and strengthen short-term mean correlation coefficients between CHF/USD and practically all other major currency pairs. Moreover, further appreciation of the average correlation coefficient can be expected, as on Thursday the SNB will publish its quarterly bulletin, while on Friday the KOF will unveil its forward-looking economic barometer.