Is CHF Safe Haven Status at Risk?

Daily Forex Fundamentals | Written by Easy Forex | Apr 16 09 08:43 GMT |

The CHF remains one of the main destinations for safe haven flows during times of risk aversion. Strong CHF is a threat to the Swiss economy and increases the risk of deflation. In mid March, the SNB cut interest rates to record low 0.25%, adopted a quantitative ease and intervened to try to weaken the CHF. SNB has cut interest rates 225 basis points since late 2008. The SNB rate cuts, quantitative ease and intervention is in response to the Swiss economy entering its first recession in six years. The Swiss GDP contracted the most since 2004 in January. The decline in the Swiss economy is attributed to weakening foreign demand as the EU and global economy contracts and the impact of strong CHF on Swiss export sales. The SNB expects the Swiss economy to contract by 2.5 to 3% in 2009. Swiss Bank UBS reported a $2 Billion loss in Q1 and said it will slash 8,700 jobs. The UBS news generates concern about deepening Swiss recession. Risk of deepening Swiss recession may contribute to an erosion of CHF safe haven status. Switzerland also faces the risk of deflation. Swiss CPI fell 0.4% in March. The UK telegraph carried an article written by Ambrose Evans Pritchard warning that Switzerland may be the next country to follow Japan into deflation. According to the article, the SNB can do little to offset the tightening of monetary conditions caused by strong Swiss because Switzerland has a small bond market which will limit the effectiveness of quantitative ease and Swiss interest rates are already near zero. Continued strength of the CHF could lead to increased risk of deflation. Increased risk of Swiss deflation may discourage safe haven flows to the CHF. The UBS news and Swiss deflation risk may force the SNB to take additional action to try and weaken the CHF. The SNB recently announced that Phillip Hildebrand is the new chairman of the SNB. Hildebrand is outspoken in his support of efforts by the SNB to weaken the CHF. Hildebrand's appointment means that the threat of intervention to weaken the CHF will increase in the months ahead. CHF is also vulnerable to attacks on Switzerland's bank secrecy laws. Over the past few months US officials have tried to break through the Swiss bank secrecy laws in search of suspected tax cheaters. The EU commission also expressed concern about Swiss bank secrecy laws. The combination of weakening Swiss economy, expanding banking crisis, falling inflation, threats to Swiss tax haven status and threat of intervention may erode CHF safe haven attraction. This is what happened to the JPY since the start of 2009. JPY safe haven status has been eroding as Japan's economy continues to weaken and inflation continues to fall. BOJ interest rates are near zero and the Bank of Japan has increased its implementation of quantitative ease expanding its purchase of Japanese bonds. CHF price direction and the Swiss economy may follow the path of Japan, making CHF safe haven status at risk. USD/CHF weekly chart shows the CHF in a range of 1.1290-1.1625. The 1.1660 is a 61.8% retracement of the 1.1965 -1.1160 Jan/Mar range. A break of 1.1660 could spark USD/CHF rally to trendline resistance at 1.1800. A break of the 1.1800 could spark a test of 1.2200. By Michael J. Malpede Easy Forex Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst. Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy- Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.