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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