The Swiss Franc continues to grind along.
On June 5, long positions were first initiated in the Swiss Franc at 102.22 on the Swiss Franc Currency Shares (FXF) for the following reasons. Back in September 2011, the Swiss National Bank (SNB) established a currency peg to the Euro. This was done in order to reverse what was at the time a rapid strengthening of the Swiss Franc, which was perceived as a safe haven against a euro currency crisis but was serving to choke off growth in the Swiss economy. The SNB strategy targeted a minimum exchange rate of 1.20 Swiss Francs per Euro.
While the SNB had successfully defended the peg through early June, the thesis for buying the Swiss Franc at the time was the notion that the ability to maintain the peg through the summer could come under heavy pressure as crisis conditions continue to mount in the Euro Zone. The SNB had already polluted its balance sheet to maintain the peg, and an accelerating depreciation of the Euro would eventually induce the SNB to reset the peg to 1.10 Swiss Francs per Euro or to abandon the peg altogether, both of which would likely result in a sharp and sudden rise in the value of the Swiss Franc.
While the Euro currency did depreciate from as high as 126.74 euros per U.S. dollar in early June to as low as 119.73 euros per U.S. dollar by mid July, the SNB was able to hold its ground on the peg and the euro has since reversed higher back to the 124 euros per U.S. dollar range. Thus, the SNB survived this latest round and any immediate pressure on the peg appears to be off for the time being.
While the peg of the Swiss Franc to the Euro is likely to come under renewed pressure at some point again in the future, the interest in maintaining the FXF position in portfolios until this next episode has diminished. This is due to the fact that the SNB continues to further pollute its balance sheet in order to maintain the peg. As a result, the longer this peg is held in place under stressed conditions, the greater the potential that such policy resolve could eventually lead to unintended negative consequences for the Swiss economy and its currency.
For these reasons, positions in the Swiss Franc were closed on August 27 at 102.62 on FXF for an incremental 0.4% gain during the brief three month holding period.