Ever since the global financial crisis began, the Swiss franc has been heading higher overall.
For years, traders and investors alike invested in this currency as a safe haven because its currency was backed by gold. However, a number of years ago, Swiss officials sold off the gold that backed their currency. So it’s no longer technically a safe-haven to run to but experience has taught me that investors still see it as one.
So when the global financial crisis hit, investors ran to the perceived safety of the franc.
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Their export and tourism industry simply wasn’t ready for this enormous surge and therefore they’ve not been hedged enough to account for these all-time highs in the franc.
Therefore all of their customers in these other countries are holding weaker currencies with which to purchase Swiss goods which are priced in “strong francs.”
This has to change or else it’s going to rip the Swiss economy a new one.
That’s why I’ve said in my predictions for 2011 that the Swiss franc will finally back off of its all-time highs and retreat.
Will there be currency interventions from their central bank? I know they have talked about it. But that could be just an attempt to jaw-bone the franc lower.
The more likely scenario is that the Swiss economics soften and as the weaker fundamental data starts to pour in, it will cause the franc to begin to weaken.
But just to show you how bad the Swiss are feeling the heat right now … the Swiss government will hold a roundtable talk Friday with representatives from Switzerland’s banking, machinery and tourism industry.
They’re going to discuss the strengthening franc.
Among the ideas that will be thrown around are: a special exchange rate for hard-hit exporters or steps to stop the Swiss banks from engaging in speculative currency trading or even pegging the Swiss franc to the euro.
I seriously doubt any of these proposed scenarios will actually become a reality. But just that they are thinking this way shows you that they are feeling the heat over there.
Since the eurozone’s sovereign debt problems won’t be solved tomorrow, many feel that the franc could continue to rise as a result.
However, I believe that as the Swiss economic condition begins to soften, more investors will switch to being a buyer of the dollar earlier on in 2011, rather than the franc. So in other words, the dollar will become the defensive currency of choice in early 2011.
Now by latter 2011, I feel that the greenback will plummet very hard. But in the meantime, I feel that the franc will begin to take it on the chin in the weeks to months ahead.
About the Author: Sean Hyman
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