The Swiss franc has been trading near last four-month highs against the euro, the strongest since the Swiss National bank set a cap at 1.20. CurrencyShares Swiss Franc Trust (NYSEArca: FXF) has gained about 2% year-to-date, but Switzerland’s economic minister says the currency will lose value in the near future.
The Swiss National Bank imposed the 1.20 cap last September and the franc has traded below its high set in September at 1.2065 against the euro. The World Economic Forum Delegates are confident that the SNB will keep on defending the franc’s ceiling as the bank searches for a new chief, after Philipp Hildebrand’s resignation, reports Simone Meirer for Bloomberg. [Swiss Franc ETF Gains on Euro Woes]
“Even if the Swiss National Bank exercises excellent restraint relative to the U.S., the national finances are still extremely vulnerable because of the sheer size of the Swiss banking industry,” Michael Rawson for Morningstar wrote in an ETF analysis. “Investors with a dim view of U.S. monetary policy would be better off investing in gold, commodities or European stocks.” [Swiss Franc ETF Higher After SNB Chief Steps Down]
Furthermore, the Swiss economy is not expected to grow quickly, and long-term currency appreciation usually occurs when a country is growing. [Swiss Franc ETF Subdued on Central Bank Actions]
The Swiss franc appreciated quickly in 2011 because of the European sovereign debt crisis and weakness in the euro. Investors found the Swiss franc to be a safe haven and the currency appreciation threatened the domestic export markets. The SNB intervened and problems such as competitive currency debasement and inflation could persist if the SNB prints more francs, reports Rawson.
For the log run, there is not much reason to believe that the franc will appreciate more against the U.S. dollar , and historical cash returns can hardly keep up with inflation. Rawson further adds that although the franc is seen as a safe-haven currency, in normal times it has an 87% correlation to the euro and the country has an outsized economic exposure to the hurting international finance sector.
CurrencyShares Swiss Franc Trust
Tisha Guerrero contributed to this article.
Read the disclaimer; Tom Lydon is a board member of the funds for Rydex|SGI.
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