For some time now we have been contrarian dollar bulls. (Risk-off short squeeze anyone?)

But Winston Wolfe reminds us to respect the mighty Swissie… – JS

In a world where credibility is increasingly scarce, the Swiss franc has a surplus of credibility. As a result, the Swiss franc rallied enormously since the first of the year.

Even better, the most likely scenarios over the next 6 months could feed into credibility issues, pushing the Swiss franc even higher.

The demand for safe, secure assets that hold their value is absolutely gigantic right now. It’s the largest I’ve seen it in my lifetime.

Thirty months after the Lehman blowup, the demand for safety dominates nearly every other concern in the financial world.

We’ve seen the risk on/risk off trade as a major factor in the markets, but even during the risk on phases, investments with some safety have performed well. Simply put, many people are very worried about losing money.

We can see this in:

Incredible demand for U.S. Treasuries

Obsession with Gold and other precious metals finding its way into mainstream thought

Inflation as a widespread concern in the U.S. (despite mild actual inflation)

We don’t have to believe or agree with any of these stories to recognize they are linked by a common theme. There is a large, unfilled demand for assets that will hold their value. It doesn’t matter if it is U.S. Dollars, Gold, Treasuries, Oil – the demand for any investment that can hold value over a few years is very high.

The most common safe haven assets are well known – U.S. treasury bonds and gold are well known safe haven assets. But a shrewd trader will look in other markets to see how the high demand for safety will spill over into other areas.

As far as I can tell, the Swiss franc is easily the most credible of the major currencies. The reasons for this are simple. Switzerland has been prudent:

Low Debt to GDP at 40%

Low current inflation

Credible in fighting inflation over long periods

Swiss Reputation

This credibility is a scarce resource in the modern world. Compare the Swiss franc to the U.S. Dollar, the euro, or the Japanese yen, and it becomes clear that simply being prudent is not common in the world today.

I consider the demand for safe assets to be one of the major drivers of asset flows into the Swiss franc. The Swiss franc has easily been the strongest performer of the major currencies over the first half of 2011.

This strength is very likely to continue.

“Risk on” or “Risk off”, the Swiss franc gets stronger

In any of the major scenarios likely over the summer, the Swiss franc could gain ground against the U.S. dollar and the euro. I’d say there are several likely scenarios, which I’ll classify broadly as “Risk On” and “Risk Off.”

In the “Risk On” scenario, people are going into assets other than the U.S. Dollar and Treasuries.

But this doesn’t mean investors have abandoned their desire for relatively safe assets. They are shifting out of the safest assets, into assets that still have high levels of safety.

The Swiss franc is easily the most credible of the major currencies. So if the current dominant ideas of “Risk On with a safe asset preference” continues, the Swiss franc could outperform.

What happens in the “Risk Off” scenario? Well, just like happy families are all alike but every unhappy family is unhappy in its own way, the “Risk Off” scenarios each make the world a less happy place in a unique way.

I can easily see several different “Risk Off” scenarios unfolding over the next several months.

China implodes

Commodities rally crumbles

Euro debt crisis explodes

New U.S. banking crisis

Each of these risk off scenarios are different and will result in different outcomes for different asset classes. Of course, these risk off scenarios are not mutually exclusive – any combination or all of them could happen. We could easily see China implode and the euro disintegrate at the same time!

But the reaction of the Swiss franc should be similar to any risk off scenario. The Swiss franc is close to Europe – it’s the most likely candidate for a quick safe haven bid against the euro. This makes it very, very attractive in nearly any flight to quality market – no matter the reason for the flight.

In any “Risk off” scenario, the Swiss franc might be more credible than the U.S. Dollar to some people, given the fed’s QE II and the potential for QE III. And the simple fact that the Swiss franc has been very strong against the U.S. Dollar is a reason to move into the franc – people are looking for assets that hold their value.

Charts say “Strong Trend”

In terms of the chart, the Swiss could not be stronger against the U.S. Dollar. It is knocking on the .8300 level for the last week. This support has shown a bit of resolve, but given the demand for safe assets, it may not hold long.

For the Swiss franc, the chart is inverted. When the price goes down, the Swiss franc is getting stronger.

Below is the daily chart from my personal chart book [click to enlarge]. There is an astonishingly large head and shoulders pattern in this view of Swiss franc charts. The price targets for this large head and shoulder patterns implies a price target that I used to find impossible.

But the Swiss has continued to rally – and now the Swiss is only a few points away from hitting the 78.06 level!

These patterns have a way of playing out over time. Given the odd circumstances in the rest of the world, it is possible the markets will dramatically overshoot and the Swiss franc will reach these remarkable targets.

In another chart view below, the Swiss franc broke out of a large wedge pattern and an 80 period Bollinger band within a few days in March. Since that time, the Swiss has gained over 6% against the U.S. Dollar.

This is a strong trend for the Swiss franc and the market action should not be ignored.

Swiss credibility = franc Strength

The credibility of the Swiss franc gives it value in a world starving for credibility and stability of any sort. The Swiss is currently in a trend against the U.S. Dollar, and many of the scenarios that are likely to play out over the next 3-4 months also tend to support the Swiss franc.

WW

Charts say “Strong Trend”

In terms of the chart, the Swiss could not be stronger against the U.S. Dollar. It is knocking on the .8300 level for the last week. This support has shown a bit of resolve, but given the demand for safe assets, it may not hold long. For the Swiss franc, the chart is inverted. When the price goes down, the Swiss franc is getting stronger.

This is the daily chart from my personal chart book. There is an astonishingly large head and shoulders pattern in this view of Swiss franc charts. The price targets for this large head and shoulder patterns implies a price target that I used to find impossible. But the Swiss has continued to rally – and now the Swiss is only a few points away from hitting the 78.06 level!

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