FX Alpha 19 November 2013

Why isn’t CHF weaker?

Since the amelioration of the euro zone crisis analysts have consistently argued for
weaker CHF exchange rates, yet they have not manifested. We argue that CHF is now
the last remaining safe haven and as such tends to lag moves in G10 FX.

At the height of the euro zone debt crisis moves in EUR-CHF typically tracked changes in peripheral
yield spreads. Analysts argued that as the euro zone crisis subsided and in particular as peripheral spreads tightened EUR-CHF would automatically trade at higher levels. The three key indicators of the euro zone crisis that we follow; yield developments, Target2 balances and EUR-USD shorter dated volatilities all clearly illustrate an easing of the situation. Yet EUR-CHF remains glued to levels around 1.23. It is abundantly clear that something else is going on and therefore that it requires an explanation.

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