Swiss franc risk higher after central bank comments

Week of July 28

Last week, we saw the Swiss franc depreciate strongly versus the USD. The sharp drop of more than 2% followed comments from Swiss National Bank (SNB) Chairman Thomas Jordan on Monday, when he remarked that he considered the currency significantly overvalued in an interview with Swiss daily newspaper Le Temps. The SNB has a reputation of being unafraid to intervene in foreign exchange markets, when the franc becomes too strong, in their opinion. As a consequence of the marked depreciation, short-horizon risk for the CHF/USD exchange rate increased to 6.86% from 6.76% the week before.

Risk for sterling and yen, on the other hand, was 0.3% lower for the week. Both currencies profited from the continuing dollar weakness, with the pound in particular gaining 1% versus the greenback.

At the same time, short-term risk in Axioma’s global multi-asset class model portfolio decreased by 0.74% to 5.04%. The decline was mainly driven by a reduction in standalone volatility for most asset classes. Correlations between major risk types, on the other hand, were largely unchanged. This meant that the distribution of risk contributions was almost the same as in the week before.

Particularly, the relationships between equity and FX, and between stock and bond returns, remained firmly positive, which again resulted in a very low risk reduction, compared with the case of perfect factor correlation. In fact, the diversification effect of -1.23% was exactly the same as in the week before.

Christoph Schon, CFA, CIPM

Christoph Schon is the Executive Director, Applied Research for EMEA at Axioma, where he generates insights into recent risk trends with a particular focus on fixed income and multi-asset class analysis. Christoph has been in the portfolio risk and performance analysis space for more than 10 years, having previously worked for Lehman Brothers/Barclays POINT and UBS Delta.