John Taylor Is Negative On Gold's Monetary Equivalent: The Swiss Franc
From John Taylor of FX Concepts
The Swiss Franc Should Be Relatively Weak into Late November
EUR/CHF has a dual role as both a carry crossrate as well as a barometer of global risk. During normal times the crossrate reacts to even modest movements in the interest rate differentials between the Eurozone and Switzerland as this exerts a significant impact on capital flows. However, Switzerland’s role as a safe haven will at times take precedent over the relative interest rate movements. Between December of 2009 and June of this year the sovereign debt crisis suppressed the impact of interest rate movements as money flooded into Switzerland and the survival of the single currency was at risk. In April the interest rate differential began to widen in favor of the Eurozone again, but EUR/CHF continued erratically lower into early September. This caused a divergence between the crossrate and interest rate differential that only exerted its influence once the fears in Europe subsided and were replaced by fears of USD weakness. The last time the interest rate differential was at the current level was in April of last year and EUR/CHF was around the 1.5100 area. From this perspective the crossrate should be much higher.
The EUR/CHF role as a risk gauge is mainly focused towards Europe. This is why there is a close relationship between EUR/CHF and the inverse of movements in bond spreads between Bunds and Greek or Irish Bonds. The widest point in both bond spreads was in September and then they started to narrow, which is when euro/Swiss began an upmove. However, spreads have started to widen again and are close to their highs between the 10-year Bunds and Irish Bonds. Although problems in Europe have subsided, these spreads tell us they are far from over. Optimists might say that Ireland is an isolated example and the Irish government is positive as it decided to suspend debt sales for four months in hopes that the problem will pass. If the other credit spreads start to move toward new highs as well then this will trigger a downtrend in the European countries. Our cycles say that this is more likely to begin late in the month.
Trading will be choppy and erratic this week with the US mid-term elections today and the FOMC announcement on QE expected on Wednesday. The cycles call for the dollar to decline into Wednesday and then rally into early next week. We favor buying USD/CHF on weakness and if seen .9850 should be a good place. The cycles then call for the dollar to turn higher and rally into early next week and a break of .9975 signals it will trade to the 1.0050 area early next week before beginning a decline lasting into late November.