Swissie Gains as Currency Crisis Escalates

(eToro Blog)  The Swiss Franc reached new highs against the U.S. Dollar and the Euro Monday as the price of gold also reached a new all-time high trading at $1,607 per ounce. The asset flows into safe haven investments favored the Swiss Franc above all other major currencies. With U.S. politicians squaring off against each other with a Friday deadline to raise the debt ceiling, an ongoing sovereign debt crisis in the Eurozone and a general lack of confidence in recent bank stress tests by the EBA, the Swiss Franc has been the currency of choice for traders seeking a safe haven.

Nevertheless, some analysts think the move is overextended and that depending on events this week, both EUR/CHF and USD/CHF will correct. Events this week will be key, with two Spanish debt auctions on Tuesday and Thursday, and the European Economic Summit in Brussels on Thursday.

The meeting of Euro leaders and what they decide on the Greek bailout as well as addressing the hike in Italian and Spanish bond yields — which threaten to cause a major bank crisis and further Eurozone member defaults — will have a major impact on the EUR/CHF exchange rate. Also, the United States AAA credit rating has been put on review for a downgrade by Moody’s, in addition to the political infighting over raising the U.S. debt ceiling. If the U.S. credit rating is downgraded and the government cannot come to an agreement on the debt ceiling, the USD/CHF rate could drop even further.

Furthermore, even during recent tough economic times for many global economies, the Swiss economy expanded by +2.4% in the first quarter of 2011. Despite the strength of the Swiss Franc, exports continued to grow, with first quarter exports improving by +5.7% from the fourth quarter of 2010. In part due to the fact that the Swiss economy avoided a real-estate crisis, the global financial crisis hit Switzerland mildly, with the economy contracting by only -1.9% in 2009, compared to a -4.1% decline in the European Union.

Fundamentals continue favoring the Swiss Franc despite a possible near term correction, with an expanding economy and growing exports, Switzerland’s economy contrasts sharply with the EU. Considering how other major economies are coping with the current global economy, and especially with the current situations in the Eurozone and the United States, asset flows into the Swiss Franc will most likely continue.