Swiss Franc and British Pound Switch Roles, But at What Cost for Britain

Swiss Franc Recedes from Safe Haven to Pegged Currency

Looking at interesting currencies, the Swiss Franc (CHF) has been, for some time, a safe haven currency. Still its value has a demonstrated a floor of 1.20 against the euro (EUR/CHF). That is, the franc will not rise in value against the euro beyond a named point. Commitment of Traders data provided by the Commodity Futures Trading Commission tells of substantial shorting of the Swiss Franc….A dramatic switch of circumstance from past expectations, which saw the Franc appreciating for what was looking like infinity.

Net trader short positions on the franc come from a policy change as opposed to market dynamics. Seeing a distortive high in the franc against the euro, was the Swiss National Bank (SNB) and all other similar institutions globally.

Appreciating franc values became very incongruent with euro values due to not only increases in the franc, but also because of declines in the euro. Spreads between franc and euro diverged such that Switzerland found its high currency creating a decline in its exports and a huge increase in its capital accounts. Joining an already challenged global situation with a high priced currency, SNB pegged their currency to the euro. Accordingly came the 1.20 limit on CHF appreciation, or EUR depreciation.

British Pound Now Experiences High Demand

Seeing the franc out of commission as a safe haven asset, traders are plowing into the British Pound. Among institutional traders, long contracts on the pound have increased by 29,920 from April 10 through May 8, a 52.5% increase according to May 8 COT numbers. Previously institutions were net short the pound, but currently are convincingly net long.

Implications of an appreciating currency obviously don’t bode well for United Kingdom exports and economic recovery. Britain recently reported trade balance results which showed that net trade was down for Q1, but demonstrated surprising improvement in the February to March period. Exports grew at a pace of 5.5% month over month for March. This contrasts with February results that declined -3.4%.

Growing exports to overcome recent recession in Britain is challenged by European weakness, and potentially now an appreciating currency. Should economic projections improve for Britain, and given persisting European problems and a constrained ECB, traders searching for safety could settle into the pound. Add to this that the Bank of England ended their quantitative easing program on May 10 over inflation concerns developing from March’s rate of 3.5%. From all factors, "Sound as a Pound" seems to ring well now days.