Dollar/Swiss: Still a Safe-Haven Trade?

By O'Sullivan, Timothy | Modern Trader, November 2002 | Go to article overview

Dollar/Swiss: Still a Safe-Haven Trade?


O'Sullivan, Timothy, Modern Trader


Market Strategy

Historically, the dollar vs. the Swiss franc has been the purest "dollar play." Switzerland's currency is widely viewed as a safe-haven due to its high liquidity and the apolitical nature of the country. Since March of this year, dollar movement against the Swiss franc has almost directly followed the U.S. stock market's downturn. USD/CHF habitually goes in and out of being in strong correlation with the Dow Jones Industrial Average (DJIA). With recent talk of an "L-- shaped" economic recovery and potential U.S. conflict with Iraq, an opportunity can be found being long USD/CHF regardless of the direction taken by the equity indexes.

Currently, the dollar appears undervalued vs. the Swiss franc and two opportunities exist for a long position in dollars. Traders are long Swiss francs in the wake of the unrest between the U.S. and Iraq. If the situation does not escalate beyond diplomatic actions such as United Nations sanctions and resolutions, the dollar inevitably will move higher as the war risk premium abates.

For those who think diplomacy will resolve the conflict, the trade right now would be to buy USD/CHF for a test of the January 2001 highs. Conversely, a long position in the equity indexes may prove to be a mistake. The uncovering of irresponsible corporate spending and accounting procedures, the questionable potency of last year's interest rate cuts and rising concerns about the fiscal budget make the risk/reward of a bullish stock position questionable.

In the event military action materializes, the initial market reaction undoubtedly will be further buying of Swiss francs -- the traditional safe-haven trade. This scenario presents an excellent opportunity to enter a long dollar position. The trade should be made no later than a week after the onset of the war. Regardless of the reasons for war, Iraq sits on top of the second largest oil reserve in the world. There is no better way to jump start the economy than to get the price of oil down to $15-$20 per barrel, something a quick regime change in Iraq would work toward achieving. …

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