By: Dr. Mike Campbell

When the financial storms are raging and major currencies are slipping, savvy investors look for a safe place to put their funds until the worst of the storm is over and it is time for them to return to the market on the hunt for bargains. One traditional safe haven is gold and regular readers to these articles will have charted the inexorable rise of gold to new highs; a trend that still has a way to go as world markets continue to be in turmoil. A second traditional safe haven is to find a currency that investors see as rock solid and convert funds to it. In this model, as over currencies devalue, the worth of the safe haven currency is maintained, growing in value against the depreciating currency. When the tempest is past, the investor reconverts to the original currency and locks in a substantial profit – or so the theory goes.

But what is the situation from the perspective of the country that is regarded as a safe haven? The country sees the value of its currency pushed up, whilst this has little effect within the country for goods produced locally, it can mean that imports are cheaper, but the public rarely benefit from this as importers usually pocket the increased profits. The downside for the country is that its exports become increasingly expensive in importing markets which eventually starts to choke off demand (Japan is beginning to see this). If this continues unchecked, companies start to become economically unviable and lay off workers because of decreased demand and to save money.

The Swiss economy has long been regarded as a solvent and prudent one (however, like all modern democratic economies, it has its own debt burden which stands at 38% of GDP currently). Consequently, Switzerland has seen funds flood in pushing up the value of the Swiss Franc against the US Dollar by 30% in the last year alone. The Swiss have indicated that they will act to reduce the value of their currency, but have not said how. A first component of this was to reduce interest rates to 0.25% to make the currency less attractive to investors. This move will have little effect since the falls of other currencies relative to the Franc are already multiples of this. The most likely scenario is that the Central Bank will intervene in the markets to sell the Franc and thereby devalue it. However, a similar move by the Japanese last week only served to depreciate the currency for a matter of days – perhaps the Swiss will have more luck. Investors are likely to go short on the Swiss Franc and then reverse their positions later as it climbs again.