by SignalFactory · January 16, 2020 | 09:21:43 UTC
The
Franc frustrated institutional buyers of Sterling this week after Washington
said it’ll be watching Switzerland closely for signs of currency manipulation
in the months ahead, prompting a surge higher by the safe-haven unit.
Switzerland’s
Franc has knocked the Dollar off its perch as 2020’s best performer since the
country’s central bank had its collar felt by the U.S. Treasury on Monday. It’s
also risen 1.6% against the Pound this week, leaving it 2.3% higher for 2020
and triggering the 1.2550 stop-loss that accompanied a Monday recommendation
from TD Securities to buy the Pound-to-Franc rate and target a move from 1.27
to 1.30 over the coming weeks.
That
trade was typical of how any institution might have played an ebbing of ‘no
deal’ Brexit risk as well as the recent and ongoing improvement in investor
risk appetite. And it should really have been a good one too. After all, the
safe-haven unit is set to lose from Wednesday’s signing of the long-elusive
‘phase one deal’ to end the trade war between the U.S. and China.
The
U.S.-China deal extends a lifeline to the troubled global economy and lessens
investor demand for safe-haven assets like the Franc, Japanese Yen and
government bonds of all stripes. And with Sterling expected to benefit from a
large fiscal stimulus, details of which will be unveiled on Wednesday 29
January, the Pound was as good a candidate for gains over the Franc as any
other currency even if the British unit has suffered of late as markets
price-in the increased prospect of an interest rate cut.
But
late Monday brought with it the latest U.S. Treasury report on the foreign
exchange policies of major trading partners and included on the monitoring list
inside it was Switzerland. In other words, Washington suspects Switzerland and
the Swiss National Bank (SNB) of currency manipulation.
“This suggests that the US would now be more pleased with a
stronger Swiss franc,” says Oliver Korber, a strategist at Societe
Generale. “The central bank now faces the risk of seeing markets testing
its capacity to defend further appreciation. As the US economy slows, the
market’s appetite for safe havens looks set to grow. The JPY and CHF should be
the main beneficiaries of these flows, mostly at the expense of the USD.”
Treasury
criteria for ‘currency manipulator’ designation are simple in that a country
must tick three boxes. It should have a trade surplus of more than $20 billion
with the US, a current account surplus of more than 2% of GDP and have bought
foreign currency equivalent to 2% of GDP over a 12-month period. Designation as
a ‘currency manipulator’ could ultimately lead to trade tariffs and other
measures being imposed on the guilty party.
Switzerland
meets two of those three criteria in that it had a trade in goods and services
surplus of $22bn last year, on U.S. Treasury numbers, and a current account
surplus equal to 10.7% of GDP. It fell short on only the requirement to have
acquired foreign currency equal to at least 2% of GDP over the last 12 months,
with recorded purchased being equivalent to only 0.5% of GDP.
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