The Swiss franc, perhaps the best-known safe haven currency among them all, has soared to new highs not seen since early 2017 against the euro, and highs not seen since September 2018 against the US dollar.
So, what is happening here, and why is this traditional safe currency haven so popular even when the US stock market is making all-time highs?
To understand why forex traders and large institutional investors are flocking to exchange their money into Swiss francs, it’s necessary to look a bit further than the day-to-day headlines in the financial press. Because although it seems like the stock market is on fire and everything is going well, something very strange is indeed happening in the economy.
Money printing and negative interest rates
We undoubtedly live in interesting times. For the first time in history, depositors in many countries now receive negative interest on their deposits in major banks.
It has even been widely reported – by The Guardian and others – that some banks in Denmark are now offering mortgages with negative interest rates. This effectively means that the bank will pay a customer to take up a loan.
Now, you may wonder how this can possibly be sustainable. And the short answer is that it most likely isn’t. But it is nonetheless happening, and all the cheap money flowing around has to go somewhere.
According to many commentators, a lot of this money has been flowing into the US stock market, thus fueling a stock market rally that has now lasted longer than anything we’ve seen in recent history. But it has not only pumped up stocks, but also bonds, real estate, and other financial assets.
So, why on earth would money be flowing into a boring old currency like the Swiss franc if it can instead earn double digit returns by being invested in the US stock market?
The most probable explanation to this is that the large institutions knows that this trend of free credit inflating the stock market will come to an end one day. The question everyone is asking is not if it will happen, but when.
How to trade EUR/CHF
What most of you probably wonder now is how you can take advantage the run the Swiss franc (CHF) is experiencing.
Looking at the daily chart of EUR/CHF, it’s clear that this forex pair is among the better trading pairs for trend-following traders in particular. The pair trends nicely, with well-defined swing tops and bottoms in the chart.
On January 14, the euro broke down through a major support area around the 1.080 level against the franc. This means that the pair is now in a territory where it hasn’t been since early 2017, and we therefore need to go back to that time to find relevant support and resistance areas in the chart. However, be aware that when we go this far back, these levels are not as relevant for shorter-term price moves anymore.
A better way to read the situation now may therefore be to look at the RSI indicator at the bottom of the chart, which is now in oversold territory for the euro. A short correction higher is therefore likely at this level. But with the major support level broken, further downside for the EUR (and new highs for the CHF) should be expected over the mid- to long-term.
The EUR/CHF forex pair may therefore be a good opportunity for trend traders to follow further. Although you should always be prepared for temporary reversals, the clear long-term trend here is for the euro to move lower and the franc to move ever higher.