Main menu


Column: Rare Swiss franc stress reflects deeper market strains

featured image

ORLANDO, Fla., Oct 18 (Reuters) – There’s a worry about the Swiss roll.

Year-end is always a stress point in financial markets, as investors seek to build up dollar cash buffers and collateral to minimize risk and exposure over the illiquid holiday period.

Nowhere is this more apparent than “cross-currency basis swaps”, a measure of demand for dollar funding often seen as a proxy for wider market stress. This year there’s an added twist: the Swiss franc basis has blown out to levels not seen for years.

Register now for FREE unlimited access to

This seems unusual because the Swiss franc is considered one of the safest, strongest and most stable assets. Even though Swiss franc cross-currency basis does move in times of market stress, it usually does so less than its peers.

Of course, this year has turned investors’ assumptions upside down, thanks to the biggest wave of inflation and borrowing costs in 40 years. The Swiss National Bank (SNB) has even reversed years of massive franc-selling intervention to wade into the currency market buying francs.

Three-month euro, yen, sterling, and franc all went deeply negative at the end of September, reflecting strong demand for dollars as one might expect given that the contracts’ time horizon covers the year end. With the exception of sterling, they remain deeply negative.

The Swiss franc basis stands out – it is notably wider than the others, and significantly wider than it usually is. The Japanese yen, traditionally the franc’s rival “safe haven” currency, usually boasts a deeper negative basis. Not now.


Huw Roberts, head of analytics at Quant Insight in London, acknowledges the problems at Credit Suisse (CSGN.S) are behind the surge in Swiss demand for dollars. He notes that the SNB last week drew $6.3 billion from the US Fed’s currency swap line facility, roughly double the amount drawn a week earlier.

Severe stress at one of Europe’s largest banks is bound to have ripple effects domestically and beyond, for example stoking concerns about counterparty risk.

“Year-end pressures can clearly act as a catalyst for the basis widening, but you have to think the broad tightening of financial conditions is starting to have an impact too,” he said.


Global financial conditions have tightened rapidly and broadly, and liquidity across a range of markets is drying up. It’s a dangerous cocktail. The International Monetary Fund last week warned that global financial stability risks are rising, and cross-currency basis is among them.

“Typically around the year end there’s a bit of balance sheet stress as some trades are taken off or reshuffled, but the magnitude of the (moves) is quite unusual,” said Tobias Adrian, director at the IMF’s Monetary and Capital Markets Department, specifically highlighted.

“There are dollar funding shortages.”

Cross-currency basis is effectively the premium investors or corporates pay to swap currencies into dollars. A widening basis going deeper into negative territory reflects rising demand for dollar funding.

Switzerland has also been rocked by the deepening crisis at Credit Suisse. The bank is seeking a capital injection from the Middle East after being battered by losses and scandals, and investors have dumped its stocks and bonds.

This helps explain the Swiss FX basis widening. At the same time, Swiss financial conditions have tightened more than most others in the developed world, even though the SNB has not been particularly aggressive in raising interest rates.

Goldman Sachs’ Swiss financial conditions index rose to an 11-year high above 107 bps late last month, up more than 300 bps so far this year. That’s a much bigger increase than every developed economy Goldman tracks except the United States.


Fabio Bassi, rates strategist at JP Morgan, is more sanguine – markets are “not yet in a massive flight to quality period,” and some of the Swiss franc basis move can be explained by technical factors around the SNB’s tiered system for remunerating bank reserves .

He also acknowledges there may be a simpler explanation for the current stress being exhibited in cross-currency markets.

“The Fed is tightening and delivering QT (quantitative tightening) faster than other central banks, which is going to create a relative scarcity of dollars. So the year-end effects are maybe appearing earlier this year,” Bassi said.

The dollar is up 17% this year on an index basis, up almost 30% to a 32-year peak against the yen but has appreciated “only” 9% against the Swiss franc.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Related columns:

King dollar delivers bumper Q3 for macro hedge funds (Oct. 9)

Global contagion risks should put G7 on standby (Sept. 29)

RIP Great Moderation, hello Great Volatility (Aug. 30)

Register now for FREE unlimited access to

By Jamie McGeever; Additional contributions from Gertrude Chavez-Dreyfuss; Editing by Lisa Shumaker

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Jamie McGeever

Thomson Reuters

Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the US again. Focus on economics, central banks, policymakers, and global markets – especially FX and fixed income. Follow me on Twitter: @ReutersJamie