LONDON (Reuters) – Bets that pushed the Swiss franc to a five-year high as the coronavirus crisis revived euro break-up fears have gone spectacularly sour, the latest in a line of franc moves to leave traders with bloody noses.
From a peak close to 1.050 per euro, the safe-haven currency has slumped 4% since the French and German governments jointly proposed a European Union rescue fund on May 18, and was trading at around 1.09 francs on Wednesday.
That is a small move compared to the “Frankenshock” of 2015, when the franc surged 15% in a single day, or the impact of Mario Draghi’s hint in June 2017 that the European Central Bank might end policy stimulus, but still painful for speculators.
Graphic: Swiss franc 2020 performance – https://fingfx.thomsonreuters.com/gfx/mkt/xlbpggyejpq/Pasted%20image%201591716622026.png
Those holding to long franc bets before a June 18-19 EU summit could be in for more discomfort if the proposal wins approval.
Coming weeks should bring “a pretty big shift in the speculative flows and some of our own flows also suggest that,” said Ebrahim Rahbari, chief G10 currency strategist at Citibank.
“The pressure on Swiss franc specifically to reverse its longstanding long position is probably even bigger than for some of the other safe havens,” Rahbari said, adding he had turned bearish on the franc in mid-May.
But with the bailout fund’s shape still under discussion, leveraged franc bets against the dollar are at four-year highs of $1.2 billion, according to the U.S. Commodities and Futures Trading Commission.
In euro/franc, the turnaround is more dramatic; Royal Bank of Canada reports an 11% euro overweight on its client trading platforms, a swing from a 13% short on 15th May but below 2020 highs.
JPMorgan was among those stopped out of the short euro/franc trade with a 1.7% loss, after seeing franc appreciation as “inevitable”.
“The EU seems to be at least on the surface of things pulling together in a way that caught the market by surprise,” said John Hardy, head of FX strategy at Saxo Bank.
Graphic: Swiss franc positioning – https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkdybyvm/Pasted%20image%201591717147482.png
SEEN THIS BEFORE
Switzerland’s enormous balance of payments surplus makes it a magnet for safety-seeking flows during times of trouble, especially if the problems happen to be in the euro zone.
That has long been a headache for the Swiss National Bank, which leans on the franc to protect the export-oriented economy. That’s why it was willing to risk U.S. ire with heavy franc selling over March/April to keep the exchange rate below 1.05 francs per euro.
But sight deposits at the SNB, a proxy for FX interventions, last week fell for the first time since end-February, easing pressure on the SNB to cut its policy rate next week.
Graphic: Swiss sight deposits – https://fingfx.thomsonreuters.com/gfx/mkt/xklvyglyjvg/Pasted%20image%201591716738167.png
The case for more franc weakness is not clear cut, however.
On the one hand, the franc looks overvalued — at 1.078, it is well above its 20-year average of 1.35 francs per euro.
But even if the EU pulls off the rescue fund, economists expect that the bloc’s economy will stay in the doldrums for longer than Switzerland’s.
“I personally don’t like shorting a currency which has (a big) current account surplus,” said Kevin Zhao, head of global currency and fixed income at UBS Asset Management, adding that the Swiss economy is growing more strongly than the euro zone.
The fate of many previous franc wagers means some, like Andreas Koenig, head of global FX at Amundi, Europe’s biggest asset manager, say directional bets are a lose-lose proposition.
“To be long Swiss franc you stand against the central bank, which is not normally the nicest situation, but if you are short the Swiss franc you are against a strong fundamental trend,” Koenig said.
Graphic: Switzerland: the world’s lowest interest rate – https://fingfx.thomsonreuters.com/gfx/mkt/oakpeqywmpr/Pasted%20image%201591716468596.png
(Reporting by Elizabeth Howcroft; Editing by Saikat Chatterjee, Sujata Rao and Catherine Evans)