Bloomberg

(Bloomberg) -- The Swiss franc’s reaction to the latest gyrations in global markets is raising questions about its traditional role as a haven.

The franc has fallen this month even as stocks around the world entered bear markets, and it’s now weaker against the euro than at any time since Switzerland abandoned its exchange-rate cap a year ago. The Swiss National Bank replaced the ceiling with a policy of interest-rate cuts and franc sales to keep the currency weak, and Pacific Investment Management Co. says it’s now too illiquid to trade.

The franc’s slide, which puts it on course for its biggest monthly drop since August, may be down to policy makers intervening in anticipation of another round of monetary stimulus from the European Central Bank, according to analysts at Banco Bilbao Vizcaya Argentaria SA, Rabobank International and Standard Bank Ltd. Whatever the reason, it’s a bonus for the SNB because it should make it easier to reverse the tumbling consumer prices that are blighting the economy.

“The fact that the franc is weakening despite the ECB turning more dovish really speaks volumes,” said Geoffrey Yu, senior foreign-exchange strategist in London at UBS Group AG, Switzerland’s biggest bank. “We really have to look at the franc in a new light.”

Switzerland’s currency dropped to as low as 1.1107 to the euro on Thursday, the weakest level since the central bank shocked markets by removing its 1.20-per-euro ceiling on Jan. 15, 2015. It’s down about 2 percent since the start of this year.

Haven Allure

The franc surged 30 percent from December 2007, as the global financial crisis came to a head, to September 2011, when the SNB put the ceiling in place to stem inflows from investors fleeing the euro zone.

Speculation is mounting that the SNB is ready to cut its deposit rate further below zero in March to offset any expansion of the money supply by the ECB that same month. A rate cut would deter investors by making the franc more expensive to hold.

SNB spokesman Walter Meier declined to comment on policy when contacted earlier this week.

Switzerland’s minus 0.75 percent deposit rate is already “punitive” to the franc’s status as a haven, said Salman Ahmed, chief strategist in London at Swiss money manager Lombard Odier Investment, which oversees about $150 billion. Because the SNB would offset any ECB easing with rate cuts, the franc’s slide “has legs,” he said.

Turning Bearish

Traders agree. Since Jan. 14, options to buy the euro versus the franc in a month’s time have cost more than contracts to sell -- the first time markets have been this bearish on the Swiss currency since October 2014. The premium was 0.4 percentage point on Thursday, compared with about 3 percentage points in the opposite direction a year ago, data compiled by Bloomberg show.

Abandoning the franc cap severed a link with European equities which had seen the two assets move, more often than not, in opposite directions.

The 30-day correlation between the Stoxx Europe 600 index and the franc versus the euro was at about zero on Thursday, from minus 0.4 the day before the ceiling was scrapped. A reading of 1 would mean the two moved in lockstep; minus 1 the opposite. The correlation was about minus 0.7 when Greece was flirting with a euro exit in mid-2014, and minus 0.8 during the 2008 global crisis.

Like Japan -- whose yen has gained more than 1 percent this year -- it’s Switzerland’s current-account surplus that has traditionally made its currency an asset that investors sought out in times of market upheaval.

And it was inflows from investors fleeing riskier assets that eventually made the franc cap too expensive to defend. SNB President Thomas Jordan has repeatedly called his nation’s currency “significantly overvalued” since scrapping the exchange-rate ceiling, and late last year noted its “safe-haven status.”

That’s all in the past, said Thomas Kressin, the Munich- based head of European foreign exchange at Pimco, which manages almost $1.5 trillion. He declined to give a franc forecast because his company hasn’t held positions in the currency “for years.”

“Nobody should be trading the currency given how illiquid this currency pair is,” Kressin said. “The risk-return profile is too difficult to estimate given all the political uncertainties involved.”

--With assistance from Zoe Schneeweiss.

To contact the reporters on this story: Chiara Albanese in London at calbanese10@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net Paul Armstrong

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