Swiss Franc surge: “Canary in the coalmine” shows dark clouds ahead

16/01/2015

MONOGRAM

  • Australian dollar/ Swiss Franc cross rate is strongly correlated with FTSE 100 performance
  • Current disconnect indicates a cause for concern for equities

16 January 2015. Following the recent Swiss Franc surge, Paul Marson, chief investment officer at MONOGRAM, comments on the possible implications for UK equities:

The performance of the cross rate between the Swiss Franc and Australian Dollar is closely correlated with the FTSE 100 performance [see Graph 1 below].

There is a logical explanation behind this. The Australian Dollar is driven by demand for primary resources, which in turn is driven by global demand growth and, in particular, manufacturing in Asia – hence it does well during periods of strong economic growth. The Swiss Franc, on the other hand, tends to strengthen during periods of economic weakness, credit stress, uncertainty or loss of risk-taking appetite.

This makes the cross rate of the Australian Dollar/ Swissy a “canary in the coalmine”: a leading indicator of a weak or strong equity outlook for the UK FTSE. Recently, a significant disconnect between this rate and the UK FTSE has occurred [see Graph 2 below].

This, which was further magnified by the Swiss Franc surge, is cause for concern and merits a more cautious approach to UK equities.

 

Graph 1: Australian Dollar/Swiss Franc exchange rate vs six month % change in FTSE Index

Aussie Swissy 1 

Graph 2: Aussie/ Swissy Exchange rate v UK FTSE index

Aussie Swissy 2