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Swiss franc weakens in July as haven flows unwind

The Swiss franc is ending the month as the only major currency not to have appreciated versus the weakened dollar, illustrating how risk appetite is helping to drive investors away from the traditional haven currency.

The Swissie is also set for its biggest monthly fall against the euro since 2011 — the single currency pushed higher on Monday to SFr1.1390, taking the franc’s loss for July to 4 per cent, the bulk of the month’s fall coming last week.

UBS, which had thought it would take the rest of the year for the currency to fall to that level, attributed the decline to “the unwind of ‘safe haven’ inflows”.

Morgan Stanley said a strong risk appetite created “the ideal environment” for the Swissie and the yen to weaken.

Negative interest rates in Switzerland with a currency still seen as being richly valued make the franc “the ultimate funding currency” for carry trades as the Swiss National Bank expands its balance sheet and investors look for yield elsewhere, added the bank.

Several analysts, such as the Swiss online bank Swissquote, viewed last week’s sharp falls as a “catch-up” for the franc, which had been holding its level against the euro despite the latter’s significant gains against other currencies, particularly the dollar.

It was triggered, said JPMorgan analysts, by SNB chairman Thomas Jordan’s dovish message last week that the central bank would stick to very negative interest rates and forex intervention and was ready to increase the balance sheet.

After the repricing in recent weeks of the euro, the Canadian dollar and the Australian dollar as currencies where policy normalisation is taking place or anticipated, the Swissie is “more firmly into the ‘dovish’ bracket of currencies”, and so looks a likely candidate as a funding currency, said JPMorgan.

While all other G10 currencies and the vast majority of emerging market currencies made gains on the US dollar, the Swissie stands out for going through July more than 1 per cent weaker.

That trend may continue if US data rebounds in the second half of the year, said Credit Suisse, while further hints of policy normalisation from the European Central Bank would suggest that the Swissie could weaken further against the euro.

But the SNB, which has intervened repeatedly in the forex market to weaken the Swissie, might find that the absence of intervention would be seen by the market as “tantamount to tapering”, said Credit Suisse.

That, together with German yields falling relative to Swiss yields, suggested that further euro gains “will be difficult to sustain”.

The US dollar staged a minor recovery on Monday but investors were broadly negative on its outlook because of political uncertainty and data. Positioning data show net dollar bets turning negative for the first time in three years.

“The tide of sentiment has turned against the dollar,” said Marc Chandler at Brown Brothers Harriman, adding that the enthusiasm for the dollar — which drove a rise in the real broad trade weighted dollar in seven of the last eight months of 2016 — has gone into reverse.

“This measure of the dollar is set to record its seventh consecutive monthly decline this year, among the longest such runs in the modern era,” said Mr Chandler.