The Swiss Franc is about to reverse
Historically, the stability of the franc is due to the strength of the Swiss economy and a highly developed banking system. A peg to gold also supports its “safe currency” status. In addition, the inflation rate in the country over the past few years has averaged 0.6%, although in April 2022 it reached 2.4% amid geopolitical unrest and rising prices. oil price. The country’s average inflation rate in 2022 is expected to be 1.8%.
Investors believe in the reliability of the franc so much that after the start of the war in Ukraine, everyone rushed to buy the franc, which momentarily broke parity with the euro. However, the Swiss Central Bank has given a clear signal: if the franc continues to rise in price, it will intervene in the situation.
Why is this important?
January 15, 2015 will undoubtedly go down in the history of the Swiss franc and the Swiss economy as Black Thursday. That day, in a few minutes, the CHF soared by a quarter against the EUR and the USD.
This whole storm was caused by the Swiss National Bank (SNB) in Bern, which unexpectedly abandoned the policy it had been pursuing since September 2011. The SNB then decided to limit the growth of the national currency’s exchange rate , deciding that the euro should not fall. below 1.20 francs. Since then, the SNB has spent billions of Swiss francs to buy euros to defend this border.
The crux of the matter is that Switzerland never aspired to have a reserve currency but has one de facto. The firmness and reliability of the Swiss franc means that it is treated all over the world as a “safe haven” and redeemed whenever doubts arise in other currencies. In September 2011, in the conditions of the growing debt crisis in the Eurozone, a massive purchase of Swiss francs began.
The high demand for currency from a small country like Switzerland inevitably leads to an abnormally high exchange rate, which is detrimental to the economy, which is entirely focused on exports and inbound tourism. After all, the more expensive the franc, the higher the prices for Swiss engineering goods, watches or chocolate, and the less foreigners can afford to visit this country.
Will the situation repeat itself?
We doubt. In 2015, the US Federal Reserve was scaling back its ultra-cheap money policy and preparing to raise interest rates. At the same time, the European Central Bank was inflating the unstable Eurozone economy with cheap money. Moreover, the ECB was about to announce new stimulus measures, which could lead to a further depreciation of the European currency.
To date, the Federal Reserve has already hiked the rate and the European Central Bank is set to do the same. The Swiss National Bank does not need to buy millions of euros to keep the EURCHF currency pair above 1.00. In addition, the inflation rate in Switzerland barely exceeds the target of 2.2%, which allows the Swiss National Bank to easily control the strengthening of the national currency using instruments such as lowering key interest rates. , stimulus packages and currency sales.
EURCHF monthly chart
The pair is trading inside the falling wedge, which is technically a bearish pattern. The Swiss National Bank gave the strongest hint that it would not allow the pair to dip below 1.00. This is why we suggest placing limit buy orders just above this support level and waiting for the next reversal.
USDCHF, monthly chart
It also looks like USDCHF has found its overall support level at 0.8000. Currently, the price is heading towards the 200-month moving average, where a pullback could occur. However, the main resistance remains at 1.1080. A breakout of this level will establish a new strong global uptrend for this pair.
The world is changing in its time to admit it. The Japanese Yen has already proven that old trends can be broken. It looks like the Swiss franc is the next currency to lose its safe haven status.