Euro-Swiss Franc Currency War Triggers Flight to Safety
Switzerland’s move to abolish the cap that pegged the Swiss franc’s (CHF) value against the euro (EUR) has triggered a currency war, says James Stanton, head of foreign exchange (FX) at independent financial advisor deVere Group.
Stanton says that the Swiss National Bank’s (SNB) decision to scrap its currency floor against the single European currency has “triggered a flight to safety” and the current market volatility “will last for weeks”.
“After the SNB had previously affirmed it would defend the EUR/CHF floor, understandably no-one saw what was coming. It was a bolt-out-of-the-blue move that shook the markets to their core.
“The move yesterday heralded the start of a new currency war. Due to the enormity of this tide shift and the scope of volatility it has generated, we expect that turbulence is here to stay for a while yet.
“Investors cannot and will not shrug off what has happened over night; the undercurrent of volatility will last for weeks as the markets gradually readjust.
Stanton adds: “The SNB’s shock ditching of the cap has triggered a significant flight to safety, as the once-assumed ‘safety’ of the CHF is eradicated.
“The US dollar (USD) will make significant gains as investors plough into the world’s safe havens. This morning (Friday) we have seen the EUR against the USD breaking into the 1.15’s. The USD has risen by 0.5% today as the European Central Bank’s [ECB] move on stimulus edges ever closer. Couple this with market uncertainty surrounding the CHF and I can only see further gains from the USD against the EUR as the day goes on.
“Carry trade currencies are also expected to surge, with the Japanese yen [JPY] at the forefront. As ever, volatility will create clear opportunities and should be a viewed as a chance to rebalance portfolios to mitigate future potential risks.”