The Swiss franc failed to live up to its safe-haven reputation during the Credit Suisse collapse as investors sought shelter elsewhere, giving more of a boost to the value of gold bullion in Switzerland’s vaults than the country’s currency, according to analysts cited by Archyde.com , reports News.ro.
Swiss francsPhoto: Imar de Waard / Alamy / Alamy / Profimedia
Fund managers dumped the Swiss franc at the fastest pace in two years last week in the run-up to UBS’s dramatic takeover of Credit Suisse.
The Swiss franc, often used as a safe haven during times of market stress or volatility, lost 0.9% once morest the dollar in the week following Switzerland’s finance department said on March 13 that regulators were closely monitoring the situation Credit Suisse.
At the same time, the Japanese yen, which is also seen as a refuge in times of turbulence, rose by 2.6% once morest the dollar.
Since problems arose at Silicon Valley Bank in the US on March 9, the yen has gained more than 5.5% once morest the dollar.
Gold, another traditional safe-haven, rose more than 5% in the week following March 13 to above $2,000 an ounce, the highest level in more than a year, while government bonds saw some of the biggest inflows in the last decades.
“It certainly has to do with developments in the banking sector,” said Kirstine Kundby-Nielsen, currency market analyst at Danske Bank, on why the franc was not stronger.
Speculators added more than $800 million to their short positions in the Swiss franc in the week to March 21, according to Commodities Futures Trading Commission data, the biggest one-week gain since early March 2021.
On Sunday, the Swiss National Bank (SNB) orchestrated a $3 billion deal for UBS to buy rival Credit Suisse, backed by a massive guarantee of up to $260 billion, a third of the country’s gross domestic product, in the form support of the state and central banks.
“If it wasn’t Credit Suisse, but any other troubled European bank, you would have seen the Swiss franc rise sharply because it would have been the safe haven for European risk,” said Francesco Pesole, currency strategist at ING.
Research by the BNE in 2016 found that in previous crises, money flows into Switzerland and the franc were driven by weaknesses elsewhere.
Futures data show speculators poured money into bullish bets on the franc following the dot-com bubble burst in early 2000, following the September 11 attacks in 2001 and once more in 2008 and 2011-2012 during the eurozone debt crisis. and once once more during the Covid crisis.
During the collapse of Lehman Brothers in 2008, net inflows were driven by a “substantial rebound” in the domestic market of Swiss banks, while in the eurozone banking crisis of mid-2011 the BNE found that abandoning the euro and investing in franc was driven by foreign banks moving assets from their eurozone branches to their Swiss branches.
“The current setup does not advocate for any of these things. US bank strains have been limited to regional banks, and eurozone banks have so far been relatively unscathed,” said Michael Cahill, senior FX strategist at Goldman Sachs.
“The franc is not an all-weather safe haven and so far we haven’t had the kind of market pressures that would normally lead to franc appreciation,” he said.
Switzerland’s long history of political neutrality, but active integration into the global economy, also helps the country provide shelter during times of intense geopolitical tensions.
This trend was seen last February, when the franc gained 5% once morest the euro in the two weeks following Russia invaded Ukraine.
The Swiss franc is still a safe haven
It is one thing for the franc to have lost some investor favor during a crisis centered on Switzerland, but quite another to suggest that its days as a safe-haven currency are numbered.
For the Swiss franc to lose its safe-haven status, currency strategists at Barclays say “fundamental changes” would be needed in the country’s balance sheet, and the share of Swiss-issued assets in foreign liabilities would have to fall through “large outflows and supported”.
“This would lead to a rise in domestic interest rates, thereby increasing the yield paid on Switzerland’s external liabilities and further influencing the country’s yield differential,” said Barclays strategists, led by Lefteris Farmakis.
In such a scenario, the BNE would probably try to ease the transition by dampening capital outflows, Farmakis said.
Barclays said the chances of a “sudden stop” episode were extremely low despite the current banking turmoil, but a more difficult question to answer is whether confidence in the financial system had been eroded to the extent that a “slow erosion” episode.
Fortunately, says Barclays, “this scenario has limited repercussions for the franc for the foreseeable future.”
