The Relative Strength Index (RSI) is one of the most commonly used indicators, comparing the size of exchange rate increases over a given period to the magnitude of the declines. Two key levels are associated with the indicator used since 1978, with technical analysts talking about a range that is oversold or oversold when the values 30 and 70 exceed. The RSI, which was set for nine days, fell below 10 in the euro-Swiss franc course at the end of January, when concerns about the corona virus assessed sanctuary currencies such as the Japanese yen and the Swiss franc.
The 9-day RSI is not a benchmark, but it seems that the trade in the franc is very overcrowded. Since negative interest rates are not very attractive, Swiss equities have also benefited from the processes of recent months: no bond is worth buying, the bank account is noticeably reduced if money left on it, so Swiss index funds were doomed to growth. So far, so good 🙂
In the medium term, a number of fundamental changes have underpinned the fact that the franc has been steadily strengthening against the euro since April 2018, despite central bank interventions. In the second half of last year, it became clear that the European Central Bank (ECB) would not only postpone the start of the interest rate increase cycle, but instead launch a new series of loosening programmes and call on Eurozone member states to encourage fiscal stimulus. This has appreciated the franc in addition to unchanged Swiss monetary policy, and the process has been reinforced by renewed Italian stability concerns. For the benchmark euro-Swiss franc cross-exchange rate to exceed a key level of 1,075, it took another event.
At the same time as the trade agreement, the United States warned that it was monitoring the Swiss currency, looking at whether the country was deliberately weakening the franc, giving it an undue advantage. The local central bank is not in an easy position, being accused by a manipulative activity, while the Swiss customs office reported an all-time trade surplus. Soaring Swiss pharmaceutical exports contributed strongly to the 3.9 percent annual export growth, with foreign sales of Novartis, Roche and other pharmaceutical companies accounted for a fifth of the 37.3 billion franc surplus. In addition to the trading balance, the current account is also in surplus, so central bank”s currency weakening measures seem logical so that the country can avoid deflation and its exports not to be damaged by too strong exchange rates.
However, this will be difficult to get approved by the US Treasury Department. Based on this discretion, investors build up their frank takeover positions. Let’s not think the U.S. Treasury is aware of the situation, they took the country off the watchlist last year, but in an election year, this is also political decisions. In some ways, the achievement of foreign exchange manipulator status is “glory” for anyone interested in the topic, here you can read interesting facts here.
Lee Hardman, a strategist at MUFG Bank in London, told Bloomberg that the US decision“encouraged market participants to test the SNB’s appetite to keep intervening to dampen Swiss franc strength.” According to the expert, central bank’s interventions are going to continue, but uncertainty has developed in the short term. A week ago, Thomas Jordan, the president of the Swiss central bank, said that the central bank is not yet setting a formal limit for the strengthening of the Swiss franc. “Interest rates may be lowered if necessary, but we know there are side effects,” Jordan added. At the same time, Swiss central bank communications should be treated with caution, as it has been part of the central bank toolkit in the past. Anyone who has worked in this market for quite some time remembers how firmly Jordan claimed in January 2015 that they would not touch the exchange rate threshold just before it was released.