A Bubble In Ultimate Safety Currency?... The Swiss Franc (FXF, EWL)

Investing

Published: July 13, 2011 10:05 am

Last Updated: March 26, 2020 10:00 pm

You have witnessed the carnage spreading in Europe of late, nothing new there. But what is new is the increasing extreme reading that has been building in “the ultimate safety trade.” Not U.S. bonds, but a move into the Swiss Franc. The world’s safest currency has now hit a new high against the U.S. Dollar. When we reviewed the remaining Triple-A-rated nations earlier this year, Switzerland effectively emerged as the best of the best on that front.

The Dollar/Franc hit CHF0.8266 in early trading today. Data out of China, and perhaps a hint of QE3, have at least offered a mood that is allowing for some risk trades so far this morning. CurrencyShares Swiss Franc Trust (NYSE: FXF) hit a new high of $119.83 this morning (see 3-year chart from StockCharts.com below), up from a 52-week low of $93.37. As a reminder, it moves inversely with that Swiss Franc ratio. The iShares MSCI Switzerland Index (NYSE: EWL) is up 0.7% at $26.19 today and its 52-week range is $20.64 to $28.57.

If you put this move into the Swiss Franc in comparison, this blows away some of the moves the we saw in the Dollar/Euro. In October, we were at parity with the Franc. Now 0.80 is not out of the question.

As we previously noted on the obvious “AAA” rating, “One of the world’s banking centers and maker of watches and chocolate, the mountainous nation has a population of just over 7.6 million and GDP of $326.9 billion (2010 est.). Public debt is still under 40% of GDP, taxation is low, citizenship is not easy to get, and a blended public-private healthcare and retirement model make Switzerland a safe spot.”

There are two key issues to consider here when we ask about a bubble: Compared to Switzerland, America’s population is 310 million and its GDP is about $14.7 trillion (data from the same article). There is just no way that the currency shift can go on endlessly before the Swiss have to intervene themselves against their own currency. If the move continues in this direction, the country will not be able to do any business outside of its borders other than buying foreign assets on the cheap.

Unfortunately, you know the rest of the malaise happening in Europe, Asia, and the ongoing debt ceiling issues in America. We could elaborate further, but frankly it is becoming routine.

JON C. OGG

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