Swiss Franc Peg At Risk Of Breaking

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April 17, 2012
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After 7 months of the Swiss franc’s peg to the euro, investor demand is forcing the peg to reach its limits and challenging the Swiss National Bank to act.

Bloomberg reports that a recent Societe Generale study indicates that investors are losing confidence in the Swiss National Bank’s ability to hold the franc’s peg at 1.20 to the euro past June of this year. Should this prove true, investors in the iShares MSCI Switzerland Index Fund (NYSEArca: EWL) stand to benefit in the short term from the franc’s potential appreciation against the dollar.

In a move similar to the yen, demand for the franc has increased as investors pull away from the euro region and seek traditional safe-haven currencies. Demand for the franc is so strong that yields on six-month government notes actually turned negative recently, Bloomberg reported.

Hopes don’t seem to be too high for the currency in the long run, however. The Bloomberg article cites an Amundi executive who argues that the franc may depreciate to 1.35 per euro over the next six months, calling it overvalued. As Swiss companies like Roche report lower sales due to the rising franc, pressure will be on the Swiss National Bank to act quickly and forcefully in maintaining its promise of curbing or reversing the franc’s appreciation.

Yen Bounces Back As Investors Seek Safe Haven

In related news, the yen bounced back last week as investors sought the safe-haven currency in the midst of further concerns over the European debt crisis and China’s slowing growth.

Like the Swiss, the Japanese central bank has made efforts to curb the yen’s appreciation. However, the yen rallied 1.78 percent last week, bringing enhanced returns to U.S. investors in Japan.

MSCI Country
Indices
Local
Currency
1 Week 3 Months 12 Months
USD Local FX
Impact
USD Local FX
Impact
USD Local FX
Impact
Australia AUD 0.67% 0.09% 0.58% 5.38% 4.52% 0.86% -10.20% -8.83% -1.36%
China HKD 1.07% 1.01% 0.06% 7.05% 6.94% 0.11% -15.58% -15.74% 0.16%
Hong Kong HKD -0.33% -0.39% 0.06% 10.62% 10.51% 0.11% -8.37% -8.55% 0.17%
India INR -3.17% -2.50% -0.67% 8.42% 8.20% 0.22% -24.54% -12.80% -11.74%
Indonesia IDR -0.84% -0.52% -0.33% 3.29% 3.97% -0.68% 4.70% 10.59% -5.90%
Japan JPY 0.47% -1.23% 1.70% 6.85% 12.40% -5.54% 2.20% -1.36% 3.56%
Korea KRW -1.79% -1.13% -0.66% 10.56% 9.28% 1.28% -6.81% -2.78% -4.02%
Malasya MYR 0.70% 0.26% 0.44% 7.22% 4.44% 2.78% 3.83% 4.83% -1.00%
New Zealand NZD 1.35% 0.37% 0.98% 14.52% 9.96% 4.56% 9.93% 5.55% 4.37%
Philippines PHP 1.36% 1.05% 0.31% 14.80% 11.97% 2.83% 19.96% 18.41% 1.55%
Singapore SGD 0.88% -0.03% 0.91% 12.10% 8.16% 3.93% -5.14% -5.74% 0.59%
Taiwan TWD 1.25% 1.31% -0.06% 11.22% 9.49% 1.73% -9.31% -7.83% -1.48%
Thailand THB -0.53% -1.16% 0.62% 18.33% 14.66% 3.67% 7.02% 9.44% -2.42%

 

The iShares MSCI Japan Index Fund (NYSEArca: EWJ) returned -0.57 percent, while the local MSCI Japan Index returned -1.23 percent. Investors in the Maxis Nikkei 225 Index Fund (NYSEArca: NKY) saw returns of 0.35 percent, while the local Nikkei Index returned - 1.9 percent at the end of the week.

Japanese equities have rallied through much of 2012, but the yen’s depreciation has taken a bite from the returns of U.S. investors in Japan. However, last week’s performance may signal a shift in the trend: As investor concern about countries like Spain and Italy increase, the yen may strengthen as an alternative safe-haven currency.

On Monday morning, the euro reached its lowest level against the yen since February, after Spanish and Italian 10-year bonds yields rallied. As the European debt crisis continues, U.S. investors with Japanese exposure stand to benefit if the yen continues on its rally. For those unwilling to take the currency risk, funds like the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the db-X MSCI Japan Currency-Hedged Equity Fund (NYSEArca: DBJP) are viable alternatives that hedge against currency movements.

More information and data on currency performance is available in the Index Universe Currency Impact Report.

 

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