Swiss Franc Surge: “Canary in the coalmine” shows dark clouds ahead

• Australian dollar/Swiss Franc cross rate is strongly correlated with FTSE 100 performance
• Current disconnect indicates a cause for concern for equities

16 January 2015. Following the recent Swiss Franc surge, Paul Marson, chief investment officer at MONOGRAM, comments on the possible implications for UK equities:

“The performance of the cross rate between the Swiss Franc and Australian Dollar is closely correlated with the FTSE 100 performance (see Graph 1 below).

“There is a logical explanation behind this. The Australian Dollar is driven by demand for primary resources, which in turn is driven by global demand growth and, in particular, manufacturing in Asia – hence it does well during periods of strong economic growth. The Swiss Franc, on the other hand, tends to strengthen during periods of economic weakness, credit stress, uncertainty or loss of risk-taking appetite.

“This makes the cross rate of the Australian Dollar/Swissy a “canary in the coalmine”: a leading indicator of a weak or strong equity outlook for the UK FTSE. Recently, a significant disconnect between this rate and the UK FTSE has occurred (see Graph 2 below).

“This, which was further magnified by the Swiss Franc surge, is cause for concern and merits a more cautious approach to UK equities.”

Graph 1: Australian Dollar/Swiss Franc exchange rate vs six month % change in FTSE Index

19.01.2015 Swiss France Surge Graph 1

Graph 2: Australian Dollar/Swiss Franc exchange rate v UK FTSE index

19.01.2015 Swiss France Surge Graph 2


Swiss Franc Surge: Do They Know Something We Don’t?

• Franc rise will have massive impact on exports of goods and services which are 66% of Swiss GDP and imports which are 52% of GDP
• Could this be a sign of impending euro quantitative easing on an exceptional scale?

London, 13 January 2015. Paul Marson, chief investment officer of MONOGRAM, comments on the Swiss central bank’s surprise announcement that it has abandoned its currency peg with the euro:
“Today’s announcement is puzzling. Switzerland’s economic situation isn’t that different from September 11, when the peg was bought in to stave off deflation. Core inflation is 0.3% today, and was 0.2% in 2011. Arguably there may be greater demand for Swiss francs from capital flight from Russia, but such a currency rise will have a big impact on Swiss growth and inflation and on company earnings [Swiss companies will largely not have hedged currency exposure, in expectation of a continuing cap].

“With imports 52% of GDP and exports 66% of GDP, the currency really matters in Switzerland – and this will really damage Swiss exporters. Import prices will weaken, once again raising the spectre of deflation and growth is likely to weaken: the very same concerns that the Swiss National Bank (“SNB”) raised in 2011 would appear to apply today.

“Maybe the SNB knows something we don’t? One explanation is the possibility of euro QE on a greater than anticipated scale, perhaps the SNB decided not to fight the ECB and is unwilling to see a further substantial balance sheet expansion (and suffer the practical difficulties that coincide with the eventual unwinding of those positions)? Perhaps ECB quantitative easing has forced the SNB to throw in the towel after a CHF 307 bn (398%) increase in the monetary base since mid-2011? After all that balance sheet expansion, the CHF is stronger, growth little better and deflation risks almost identical: one has to wonder, was it worth it?”

Swiss Franc/ Euro Exchange rate

15.1.2015 Swiss Franc per Euro