Let us turn our attention now to next year.The current problems will take some time to resolve, with no concrete solutions apparent in the short term. It will be a painful journey for Europe and the rest of the world. There is also the question of whether any countries will leave the euro. The uncertainties will remain with us in future, and this will put further pressure on the single currency. We cannot rule out the possibility of EUR/USD parity being tested next year. It would be the first time this had happened since summer 2002.
Meanwhile, like many other countries, the US has major debt problems of its own to deal with. But the US has always managed to react much faster to economic crises. Even now, there are some positive signs to be read in the US economic data, so we think that the USD will remain the refuge currency of choice. This is already being reflected in a very illiquid capital market.

Let us assume that the Swiss National Bank continues to successfully prevent the franc from strengthening. Then, in the event that it actually set a new lower limit of 1.3000 against the EUR - keeping enormous pressure on EUR/USD - USD/CHF would climb above 1.1000 as a result.
Yet our view is that the primary uptrend in the USD will simply be interrupted for a few months. In the long-term (looking more than 12 months ahead), EUR/USD will return to a level significantly above parity. We doubt that the SNB would be able to defend for long an increase in the lower EUR/CHF limit to 1.30. The higher the SNB sets the minimum exchange rate, the more tempting it becomes for speculators to take on Switzerland's central bank. Swiss economic data suggest that the strength of the CHF is unsurprising and can be explained.

Given the expected volatility in exchange rates, even conservative investors may wish to consider more active management of their forex investments - whether this is by means of forward transactions or option strategies, or using DOCU’s/BLOC’s to optimise their cash holdings.

18th November 2011