During our evaluation period beginning 2012, the yield spread between the US 2-year bond and a Swiss equivalent has widened by more than 200 basis points but the exchange rate hasn’t followed through as much as it should have been as it benefits from risk aversion inflows. The Swiss franc remains the most overvalued currency against the dollar, in terms of yield divergence.
- Sometimes Swiss franc’s correlation with the 2-year yield spread (US-Swiss 2 year) falls to negative, though, at times, it has shown a relatively high positive correlation, as high as 90 percent. For example, 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. The correlation is currently at 54 percent, suggesting rising synchronicity with the yield spread.
- 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 till October with an occasional bounce to positive territory. It hasn’t gone much to the negative since, until recently.
- 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.
Yield spread (2016-19):
- Since August 2016, the spread widened from 213 bps (U.S - Switzerland) 363 bps by October 2018. And Swiss franc declined from 0.965 per USD to 0.995 per USD.
- Since December, after a failure to break higher, the spread has been declining after reaching 350 bps.
- As of 25th June, the spread has declined to 265 bps and USD/CHF declined to 0.976 area.
The yield spread would be a key influencing factor in the next move in USD.