Switzerland's Currency Time Bomb Is Ticking

On May 6th, the Swiss National Bank (SNB) announced they are considering taking interest rates below zero, there was even some talk of intervention.

That isn't a surprise to the market, and that is shown. The Swiss Franc (CHF) remains one of the best-performing assets this year, especially compared to the USD. The price of USD/CHF from high to low this year is down 12.50%. Meaning the Swiss Franc is stronger than the United States dollar.

Traditionally, lower interest rates in combination with a central bank cutting rates lead to a weaker currency. But that hasn't been the case for the CHF this year. This is largely because of the global uncertainty in the markets, as well as the potential for Germany to head into a recession. So, in short, buying CHF could be a hedge to the recent rally in the Euro.

Inflation in Switzerland hit 0% in April, the lowest in four years and the bottom of the Swiss National Bank's target, which is between 0-2%. The SNB Chairman Schlegel signalled a willingness to cut interest rates below 0, and stated that the central bank remains open to currency market interventions to weaken the CHF.

But at this point, the market is calling the bluff.

You see, US President Donald Trump is aiming to put tariffs on everyone, including the EU and Switzerland, which could face a 31% tariff if the 90-day pause ends. If the SNB intervene, that is seen as a big no-no by the commander in chief. He could accuse the central bank of currency manipulation, therefore punishing them with higher tariffs. This will only add to the pain of exporters facing a stronger CHF.

A stronger currency means foreign buyers have to pay more for their Swiss-made products, which could reduce demand for their goods and services. Being an export-driven economy, this could impact revenues substantially.

So what can the Swiss National Bank do?

In my opinion, it seems like they are stuck between a rock and a hard place. They either risk tariffs via currency manipulation or go into negative rates.

The only real choice they have is to punish those buying CHF by moving into negative interest rates. If large players had to pay to hold the currency, it could prevent foreign inflows. This is what we could see leading up to or on June 19th, when the central bank releases their monetary policy assessment.

If, for some reason, they do decide to risk intervention, then this could trigger some big moves, especially in the FX markets. Intervention at this stage could result in a sharp CHF weakness. This would be a welcome relief for those exporters, but a big opportunity for us retail traders.

USD/CHF and EUR/CHF in particular could benefit from the dovishness provided by the Swiss National Bank, but do I think the turnaround is coming right now? No.

There is still too much risk in the market. Although we have seen the trade tariff back and forth calm down and the volatility fall sharply, the risk of tariffs and deals not getting done still hovers over the market.

This could keep investors holding CHF long positions in the short to medium term.

One market I am particularly interested in is AUD/CHF. I think this is the market to play if we were to see negotiations fail and sentiment sway back to the risk-off side of the table.

The weekly chart shows the price trading higher for the past 4 weeks, but now we are at a major resistance point. On the daily time frame, we can see that today the price is potentially forming a strong bearish engulfing candle. If it closes this way, then the sentiment could turn to the bears.

Personally, I am waiting for a break in cycles on the daily chart. I would much prefer to wait for the price to reject this area, form a lower high and try to trade that move. But at the same time, with proper risk management, taking a pinch here wouldn't be a bad idea for me either.

But remember, this is coming from a guy that did lose 10 trades on the bounce. This is not financial advice or a trading signal, please do your own research and come up with your own decisions.