CTS Spotlight for the week of Nov. 25th, 2011: Swiss Franc

11/25/11: The credit crunch that began some sixteen weeks ago continues to play itself out. Short term US corporate interest rates (as measured by the Eurodollar futures contract) continue to climb while central banks keep government guaranteed yields at historic lows. Considering this is a European debt problem it should not surprise to see the Euro currency itself continue to flounder vs. the US dollar. Interestingly, since the Swiss pegged their currency to the Euro, it now has rolled over in earnest and is currently pointing much lower too. Elsewhere, select soft markets and the whole grain market have begun to collapse (as suggested here many times over the past few posts) indicating international demand is waning at these lofty levels. Weak demand, a strong local currency and out-right fear are dominating the commodities landscape - bulls be careful.

 

This week I thought we ought to take a look at one currency (vs. the US Dollar) that looks especially vulnerable, The Swiss Franc. Since the news of Switzerland's 'pegging' of its local currency to the Euro there has been a dramatic shift away from this once considered last bastion of security. Because of the peg (currently at 1.20 Sw. Franc/1 Euro) the Swiss believe they can control a run-away deflationary spiral that so often affect's countries with rapidly rising currencies. The irony of this belief is that they may indeed get a falling currency, and maybe even a bit more. The chart above is a classic example of what I like to call 'too far too fast'. The end result of these violent moves is often going right back to where the breakout started from. The recently confirmed massive bear flag pole formation (indicated on the chart above) seems to confirm this potential outcome. The rally that kicked this whole move higher off started at 85.73 and the bear flag pole formation target currently sits near .87. The fact that the market has consolidated at the 50% level and subsequently failed further supports this conclusion. So what may cause such a dramatic turn? Firstly, we are well aware of the fact that we are very firmly with another 'credit crunch'. Fear is dominating and when it does, people run into the only thing they can really trust - and for now that still remains the US dollar. Couple this macro backdrop (money moving away from Europe and towards safety) with local political meddling and one can easily see this scenario play itself out. Indeed, of late there have been more calls from Swiss politicians for an even greater devaluation of their currency peg with the Euro - with 1.3 and even 1.4 being tossed around (news link).

So couple local politics with an already weak Euro backdrop and we have the makings for the complete unwinding of a previously violent bull market. Additionally, the charts do confirm this fundamental outlook. The Swiss may indeed get exactly what they want (a weak currency) but the jury is still out on weather it will solve their domestic economic troubles.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

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