Fundamental Analysis: Focus on the Franc’s Mini ‘Flash Crash’

The Asian session today was a highly active one for the Swiss franc. CHF lost over 1% against most major currencies in the early hours of this morning, a move that appears to have been caused by low liquidity and algorithmic trades.

The franc reached nearly three-month lows against the dollar at around Fr.1.01, a move of over 100 pips. Similar volatility was in evidence against the pound, moving above Fr.1.30, again temporarily, and the euro which reached nearly Fr.1.14.

In each case, the move back downward by other currencies against the franc was almost as fast as their initial gains.

A ‘flash crash’, but there might be deeper symptoms

Japanese holidays are typically volatile times for most major currencies, but this morning’s movement is unique. The speed of the initial movement downward by the franc — over 100 pips in less than an hour — is worthy of comment. Although fundamentals did not catalyze this particular spike, the general downward pressure on the franc over recent weeks remains important.

The main factor pressuring CHF remains rate differentials. Against the dollar in particular, the franc has struggled to recover significantly below parity. The current 2.5-3.75% differential between the SNB’s target rate and the Fed’s funds rate is a very strong positive fundamental for USD-CHF.

Also important but yet to affect the franc’s trading significantly is economic data. This morning’s releases from Switzerland were somewhat negative, particularly monthly consumer price inflation for January. The release missed expectations by 0.1%, coming in at -0.3%. This figure comes in the context of economic contraction in GDP terms likely to continue for Switzerland in 2019.

Rounding off CHF’s overall negative fundamentals are ongoing trade talks between the USA and China. Widely regarded as a haven, the franc usually does worse as traders perceive geopolitical risks to be less serious.

Trade talks and data key this week

Although a solution in the Sino-American trade talks is probably still far off, related developments are important for traders of the franc. Any significant positivity in the negotiations is likely to be negative for the Swiss currency.

Economic releases are perhaps more important in the immediate future, though. The pound in particular is set to be highly volatile after this morning’s slew of data. Also likely to dominate news in currency markets this week are speeches by Mark Carney and Jerome Powell tomorrow, plus the JOLTs job openings out from the USA that evening.

Negative picture for the franc, but probably no more ‘flash crashes’

Considering fundamentals on the whole, the franc is likely to make more losses this week against most major currencies. That said, Exness’ analysts expect releases of important economic data to cause significant volatility for many pairs with CHF.

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