Investors Wary of Swiss Franc Bets After Getting Burned

By Tommy Stubbington And Chiara Albanese 

        Six months after a sudden surge by the Swiss franc rocked financial markets around the globe, investors are largely steering clear of bets on a currency they once considered to be among the safest.
        Fund managers, many of whom lost money after the Swiss National Bank surprised them by abandoning a limit on the franc's value early this year, say they are reluctant to risk exposing their portfolios lest the currency swing sharply again. Before January, a lack of movement in the franc reflected investors' faith in the SNB cap. Now it reflects uncertainty about what the central bank might do next, they say.
        "Investors placed a lot of trust in the SNB until six months ago, but that backfired," said Constantin Bolz, a currency strategist at UBS Wealth Management, which oversees about $2 trillion of assets.
        On Jan. 15, the SNB scrapped a long-standing policy of preventing the franc from rising above 1.20 to the euro. The Swiss currency rocketed by nearly 40% in a matter of hours, an unprecedented move for a major currency that triggered turmoil in markets.
        Like many investors, Mr. Bolz's firm lost money on the franc's sudden surge. It hasn't made any meaningful bets on moves in the currency since then, he said.
        An uneasy calm has emerged as investors show more caution. Volatility has all but disappeared. The franc has settled into a new holding pattern at around 1.05 francs per euro, and its moves against the dollar have largely tracked changes in the euro-dollar exchange rate.
        Because banks see the currency as riskier than they used to, the cost of trading the franc has risen by about 40% since the cap was removed, according to ITG, a broker that analyzes the cost of currency transactions. Daily trading volumes in the last three months, after the turmoil subsided, are down by roughly a third compared with the same period last year, according to UBS AG.
        "Risk managers have question marks with the Swiss franc. They can't really model it after the jump early in the year," said Richard Benson, co-head of portfolio investments at Millennium Global Investments, a London-based currency manager with $13.4 billion of assets.
        Doubts over how risky the franc is, coupled with uncertainty over Greece's debt talks, have deterred Mr. Benson from betting the currency will fall, he said.
        The SNB cap made the franc look like a one-way bet. A stronger currency is bad newsfor Switzerland's export-focused economy, making its goods more expensive to overseas buyers. The central bank wouldn't allow the franc to rise, buying up foreign assets to keep it from appreciating, so many money managers felt safe ramping up their wagers on a fall.
        The SNB lifted the cap just before the European Central Bank announced a much-anticipated bond-buying program that drove down the value of the euro and would likely have required Swiss central bankers to buy up foreign assets at an even faster pace to keep the franc where it was.
        At the time, SNB President Thomas Jordan said maintaining the policy wasn't an option. An SNB spokesman declined to provide additional comment this week.
        Despite January's chaos for the franc, the currency still retains some characteristics of ahaven. Investors value the franc for Switzerland's strong economy and stable financial system. They still move money into the country even though the SNB has sought to deter them by keeping key interest rates below zero, effectively charging depositors to keep their money. And the country's positive trade balance with the rest of the world--it exports more than it imports--means a steady flow of money into the currency to buy goods sold in francs.
        The Swiss central bank has fought back. A wave of demand for Swiss francs late last month, after Greece called a referendum on creditors' austerity demands, prompted the SNB to intervene to tamp down the value of the currency against the euro.
        But the SNB hasn't publicly committed itself to defending a specific level for the currency, giving investors much less certainty about what it will do. The franc's new equilibrium is a mixed blessingfor the central bank. The franc's rise has petered out, but the SNB, which has said repeatedly that the currency is overvalued, hasn't succeeded in pushing it back down.
        "We struggle a bit to trade the Swiss franc. In one direction you are taking on the central bank, in the other direction you are taking on the flows," said Paul Lambert, head of currency at Insight Investment, which manages GBP397.2 billion ($618.5 billion).
        Mr. Lambert hasn't had any franc positions in his portfolio since exiting a negative bet on the currency a couple of weeks before the SNB abandoned its cap. There are less risky ways for investors to benefit from rising stress in markets, such as selling emerging-market currencies and buying the U.S. dollar, he said.
        "In our view, the SNB will not try to defend a specific level again, but make sure that the Swiss franc will not appreciate strongly again. But I'm not sure we can trust them fully," said UBS Wealth Management's Mr. Bolz.
        Write to Tommy Stubbington at tommy.stubbington@wsj.com and Chiara Albanese at chiara.albanese@wsj.com
        Access Investor Kit for Schweizerische Nationalbank
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        (END) Dow Jones Newswires

        July 14, 2015 12:17 ET (16:17 GMT)

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