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How markets learnt to stop worrying and sell the Swiss franc

If the Swiss franc is trying to tell us anything, it’s to chill out and enjoy the summer.

The currency, one of global markets’ premier retreats in times of stress, has been sliding of late – typically a sign that all is well in the world, and one in the eye for the ‘end is nigh, sell everything’ worldview.

Some Swissie-watchers have been waiting for the market to turn for some time, but last week, a combination of a rising euro, and generally benign market conditions, possibly with some one-off local flows in the mix, has pushed it over the edge. Lower demand for the franc as a bolt-hole, plus greater domestic demand for foreign assets (10-year Bunds now yield over 0.5 per cent, after all) both serve to push the currency down, particularly now that concerns about the longevity of the eurozone are fading.

For David Stubbs, global markets strategist at JPMorgan Asset Management, the franc’s decline could turn out to be a blip. But for now, it feels like a marker of a change in sentiment:

Regardless of what happened last week, even if the central bank intervened, it has been intervening consistently and the currency hasn’t weakened like this before.

Many investors, he says, have “feared” the rally in major stock indices all the way up, but now they are increasingly willing to believe in it. “Euphoria builds over years, not months,” he said. “Growth is more broad-based now than at any time since the crisis,” he said, adding that bullish positions in Swiss stocks (hedged for the potential for more franc weakness) may become a more attractive proposition.

The strong franc has been a thorn in the side of the Swiss National Bank for years. In January 2015, the central bank famously scrapped an upper limit on the currency, sending it rocketing. Since then, the SNB has consistently bemoaned the franc’s strength and stepped in sporadically to cool it down, resulting in a swelling stash of euros.

The euro is currently at SFr1.1374, up by over 3 per cent since from last week. For the franc, which has barely moved since the initial shock of the removal of its upper limit, this is a huge decline.

“Don’t miss the Swiss,” urges Morgan Stanley, which argues that its low interest rates and the long list of reasons for it to decline, could make it the “ultimate funding currency” to sell in favour of more adventurous bets elsewhere. Hans Redeker at the bank writes:

We see pent-up capital outflow needs now piling up in Switzerland, suggesting the franc will fall hard.