Market Overview

Swiss Franc Continues Rallying against Euro as Debt Fears Persist

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The Swiss currency is continuing to gather strength against the euro on Tuesday. At around 6 am GMT, the euro lost 0.14% of its value against the euro to stand around 1.1521. At the same time, the greenback recovered some of its earlier losses, rising 0.09% to 0.8183.

The franc is considered by many as a safe-haven or a place where traders can find shelter from global uncertainties and risks. There is certainly no lack of uncertainties in today's world, as both the Eurozone and the United States are struggling to resolve their debt problems. According to a survey compiled by Bloomberg, the median estimate is for the franc to finish the year at 1.26 against the euro, while in April the median estimate was 1.34.

At the moment, three Eurozone members – Greece, Portugal and Ireland - have their credit rating set to junk by at least one credit rating agency. Even bigger problem is that the crisis does not end there. In fact, it is spreading to Spain and most recently Italy. Italy has the highest debt to GDP ratio among the Eurozone countries, after Greece of course. Recently, the Italian government has passed a new package of austerity cuts aimed at eliminating the country's budget deficit by 2014 through both houses of parliament. Markets are not convinced this is enough, it seems, as the yield on Italian 10-year bonds rise above 6%. The yield on Spanish 10-year bonds is also higher, rising to 6.36%. Both the Italian and Spanish bond yields are dangerously approaching the 7% landmark, after which investors normally lose faith in a country.

Spain is also under a threat of a new financial crisis, as five of its banks fail to pass the stress test. Other banks that failed the test include one Austrian bank and two Greek banks. This group should be extended to the German bank Helaba, since the bank withdrew from the test after it became clear it will not be able to pass the test.

The greatest concern of most traders remains Greece. The troubled Eurozone member had to be bailed out twice since the onset of the financial crisis. In spite of many attempts to control its debt, Greece is only seeing a rise in its debt to GDP ratio. The IMF recently stated Greece's debt is still manageable but it is on a “knife's edge”. The Eurozone leaders have agreed upon a new bailout for Greece, but its exact form is yet to be decided. Things should be a lot clearer later this week when the Eurozone leaders gather to discuss the debt crisis. The most influential member of the Eurozone, Germany, is aggressively pushing the idea that private players, most notably banks, should bear some of the costs of the crisis.

There are a number of options on how to make the private sector participate in resolving the Greek crisis, the problem is the credit rating agencies have already made their position clear. Any “voluntary” extension of debt maturity or lowering of interest rates by banks will be viewed as a default. A default in Greece will most likely quickly spread to other troubled economies. A new proposal involves taxing banks. This way, the Europeans might avoid their plan being declared a Greek default by credit rating agencies.

Across the Atlantic, the US is fighting its own debt war, as Republicans and Democrats make little progress on raising the debt ceiling. Republicans want very deep public spending cuts, while Democrats want to balance spending cuts with raising taxes for the rich. So far, not much progress has been made in reaching a compromise. If the two sides do not reach an agreement, the U.S. government will be forced to shut down as early as August 2. President Obama said that any deal should be made by the end of this week, in order to provide enough time to turn the deal between two sides into law. The Obama deadline is approaching very quickly, and the two sides' positions do not seem to be getting any closer.

Debt fears in the Eurozone and the United States have pushed gold over $1,600 mark, a new record. At the moment, gold is trading around $1,608.05, or 0.16% above yesterday's close. At the same time, silver also climber higher, adding 0.78% to its value to stand around $40.84. Like the franc, precious metals are seen as very safe investments and their price tends to rise as global economy approaches a slump.

ACTION ITEMS:

Bullish:
Traders who believe that the Eurozone and the U.S. debt woes will push the global economy back into recession, which should provide a lot of headwind for the franc and precious metals, might want to consider the following trades:

  • CurrencyShares Swiss Franc Trust ETF (NYSE: FXF) is a long play on the franc. FXF should rise if the frank appreciates.
  • ELEMENTS MLCX Precious Metals ETN (NYSE: PMY) is a long play on precious metals. PMY should rise should the prices of precious metals climb higher.
  • E-TRACS CMCI Gold ETN (NYSE: UBG) is a long play on gold. UBG should rise if the price of gold continues to increase.

Bearish:
Traders who believe that the U.S. and the Eurozone will avoid the worst case scenario, which should send the franc and precious metals into retreat from all time highs, may consider an alternate positions:

  • PowerShares DB Gold Short ETN (NYSE: DGZ) is a short play on gold. DGZ should rise is the price of gold declines.
  • PowerShares DB Gold Double Short ETN (NYSE: DZZ) is another short play on gold. DZZ should rise more than DGZ, should the price of gold fall.
  • ETFS Short Swiss Franc Long US Dollar ETC ETF (SCHF) is a short play on the franc. SCHF should rise if the franc depreciates.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas News Short Ideas Commodities Currency ETFs Forex Economics Trading Ideas

 

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