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Fundamental Evaluation Series: USD/CHF vs. yield divergence

During our evaluation period beginning 2012, the yield spread between the US 2-year bond and a Swiss equivalent has widened by almost 200 basis points but the exchange rate hasn’t followed through as much as it should have been as it benefited from risk aversion inflows. Swiss franc remains the most overvalued currency against the dollar, in terms of yield divergence.

  • In recent days, Swiss franc’s correlation with the 2-year yield spread (US-Swiss 2 year) has fallen to 21 percent, though at times, it has shown relatively high positive correlation, as high as 90 percent at times. Just before and after the Brexit referendum in the UK, the 20-day rolling correlation was averaging above 60. Hence, it is vital to keep a watch on the Swiss yields.
  • Just after the Swiss floor shock in January 2015 when the Swiss National Bank (SNB) removed a floor in EUR/CHF at 1.20 this relation went to negative and stayed there until October with an occasional bounce to positive territory. It hasn’t gone much to the negative since.
  • Unlike the euro or the pound, the Swiss franc is considered a safe haven currency; hence the yield relation sometimes gets overlooked. However, Swiss yields are a must watch as they are the lowest for any government bonds in the world and any shift in that will mark a major turnaround in trend.

Since our last review in February, the yield spread narrowed from 224 basis points to 218 basis points. There hasn’t been much of change in the exchange rate which is hovering at the same level as February; 1.007 per dollar.

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