Swiss Stability Paired with Political Volatility – Two Trading Pairs and The Gains

In line with the politicization of the forex markets, this article takes a look at the Swiss Franc's recent fortunes in two currency pairs: GDPCHF and USDCHF. Although the Franc is influenced by its relationship with the Eurozone, it remains a strong bet in and of itself, owing in part to its reputation for stability. As both Sterling and the Greenback continue to suffer from volatility, in light of political and economic uncertainties, keeping a sharp eye on trades in these pairs might help turn you a healthy profit. In 2016, taking a position in the Franc, during times of uncertainty in Britain or the U.S., then reversing it as they began to abate, was a very positive strategy. It is likely to continue to be. Additionally, with both currencies taking a hit recently, it is possible that it is time, once again, to increase your Franc holdings. This article will first take a short look at the general state of play in terms of the Dollar and the Pound, and then provide two short-case studies in support of trading the GDBPCHF and USDCHF currency pairs, not least whilst political uncertainty continues in Britain and the U.S.

Dollar, Sterling, and Franc Indexes. Strength of the DXY does not show the whole picture. Source: FT

States of Play

The Trump Bump Ends

The U.S. President Elect's recent speech, focused on allegations as against policy, whilst not sparking an outright slump, has nonetheless added fuel to the fire in the debate over the strength of the fundamentals behind the last quarter's Dollar surge.

With the U.S. economy close to running at full capacity, there is significant doubt as to whether fiscal stimulus will in fact be as effective as it might be in other conditions. Stimulus in such conditions is also quite likely to be highly inflationary, and may spark currency depreciation, which is good news for producers, but threatens the strength of Dollar forex holdings. In real terms what this means is that caution is the watch-word, for whilst a heavy slump seems unlikely, the Dollar does look to have at least plateaued for the time being, being down for the third day in succession, and 1% lower for the week.

USDCHF (Orange), USDGBP (Blue),

Britain and the Pound

In Britain, with the High Court soon to decide on whether parliament must have a say in the Brexit decision, the government continuing its uncoordinated “policy” of pronouncing their pet EU separation ideals individually, regardless of contradictions, and the prospect of two further court cases becoming clear, uncertainty continues to tie the strength of the British Pound to politics as well as economic fundamentals. These, it has to be said, do however seem more positive than would have been imagined six months ago. Even Mark Carney, the Governor of the Bank of England, has been striking a more upbeat tone of late, despite his Brexit scepticism. Still, the fact remains that it is not positive market news that really pushes the Pound's value these days, but Brexit. Next Tuesday, in fact, is likely to be an important day for those with a position in Sterling, as the British PM outlines her exit-strategy, or potentially her lack thereof.

In forex terms, Sterling seems to have found its level of support, though how psychologically strong it is remains in question, as does whether it has much room to climb. The Pound is doing better than expected, but is still haunted by fears of volatility and worries over the economy's strength outside the EU single-market. Rises and falls in Brexit sentiment continue to dictate much of the buying and selling of the UK's currency.

GBPUSD (orange), GDPCHF (blue), GBPEUR (pink), 1 year. Source: Bloomberg

Switzerland

Trading in the Swiss currency is influenced both by the global requirement for Swiss-based services, as an offshore holding area, and its stability. In terms of volatility, the Swiss Franc has long been a “safe-haven” of sorts. The country's economy grew in 2016 by 1.3%, below expectations of 1.8%, unemployment remains steady at around 3.5%, and the country has record currency reserves of $646bn, which it intends to use to keep its currency from shooting too high in value terms. Despite this intention, as was seen when the currency originally unpegged from the Euro, when volatility and uncertainty abounds, this can prove quite a difficult task, recent SNB successes notwithstanding. Swissquote notes this when they observe that the SNB is likely to be 'less rigid [...] [u]nless moves get excessive.' As ever Switzerland is not a haven of “juicy” news, and the economy, whilst suffering somewhat from its currency's high value, continues to tick along. Expectations for the currency vary in the first quarter of 2017, however some analysts predict very strong value rises, with CHFUSD, as per the below graph, potentially reaching a level of $1.05 in the medium term. 

Forecast CHFUSD

CHFUSD (orange), CHFGBP (blue), CHFEUR (pink), 1 year. Source: Bloomberg

The First Case Study – The Trump Bump to the Moscow Blues

As everyone now knows, expectations of a Dollar slump post Trump were unfounded, with markets responding positively to potentially massive infrastructure investments, and Trump's bullish pronouncements on the U.S. economy's future. Of late, as scandal after scandal hits the man charged with replacing Barack Obama, traders are beginning to doubt the fundamentals of the Trump spurred Dollar surge. Bears are thus returning to the ascendancy.

In terms of the adage, trade the rumour, sell the news, USDCHF has had the potential to bring in steady returns over the past year. For instance, as the Trump boost began to have an impact, and the Dollar surged in value against other currencies, had you held a strong position in CHF, and converted it into Dollars, on or around the period of the 7th to the 9th of November 2016, when 1 Franc was worth $1.0226, and then reversed this position during December highs, this would have netted you around 1.03 CHF per Dollar, generating returns of around 3% on a month long investment

USDCHF Pair from the start of Trump's Dollar Rise, to recent falls.

Today, with bears returning to the ascendancy in terms of Dollar forecasts, and with the spot USDCHF price falling from 1.0234 CHF on the 1^st of January, to 1.0143 yesterday, and 1.00582 today, it seems like it might be a good time to look to history, and take a CHF position, until the recent political furore dies down, and forex Dollar sentiment returns its focus to the economic bottom line.

USDCHF - 1

The Second Case Study – Brexit the Slump and the Recovery Rally

Just like with, the Dollar, politics has shaped Sterling's year, and continues to do so as 2017 begins. Yes, fears of an absolute collapse of the Pound, of Dollar parity, and so forth, have thus far proved unfounded, although the jury is still somewhat out as Brexit negotiations have yet to even begin. Despite this, the Pound did suffer a large slump following the vote on the 23^rd of June. If you'd been, so to speak, canny, and picked up a safety first position in the Franc, one Pound would have netted you 1.4256 CHF. The following day this number fell to 1.3263. By the 1^st of November this figure was 1.1941, a near 17% fall. Soon after, following positive news for Sterling, a rally occurred which boosted the Pound back to 1.2875, an approximately 8% climb. Since the middle of December however this figure has again been falling, and presently sits at 1.2249. Whilst some good news can be expected shortly to boost the Pound once more, in so far as the Supreme Court is likely to require the British Parliament's approval for any triggering of Article 50, uncertainty will continue. Theresa May's likely hard-line speech on Brexit will also probably negate any long-term bump from the court's decision. This makes it quite likely that in the short-term GBPCHF is going only one way, making a position in the Franc seem an attractive proposition.

To provide an example of the potential returns from trading the GBPCHF pair, consider the following: A safety first acquisition of the Franc pre-Brexit, at rates of 1.4256, and a buy-back of the Pound at signs of a recovery rally, a day or two after it began, at say the £0.8280 figure available around the 7^th of November, would in Pound Sterling terms, have netted you around £1.1804. This is approximately a 16% gain. Reversing this deal again, on December highs of between 1.2875 and 1.2825 CHF to the Pound, would have generated about 1.5198 CHF, or almost £1.2403, a 20% increase on your June holdings. In this scenario, a Forex position in CHFGBP, taken against rises and falls in the sentiment surrounding British political risk, was extremely lucrative over the past year. With conditions in 2017 likely to remain similar, at least until after the 31^st of March (the British PM's self-imposed deadline for triggering Article 50), keenly trading this currency pair is likely to remain profitable.

CHFGBP 1 year. Source: Bloomberg

GBPCHF - November 1st 2016 - January 12th 2017. Source: Google