Market Extra: How geopolitics have helped drive this haven currency to a 3-year low

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The euro-Swiss franc pair is trading at a three-year high, close to the floor the Swiss National Bank abandoned back in January 2015. Geopolitical tensions, which should ordinarily make a haven currency like the franc more popular, drove it back to such lows, market participants said.

The euro-franc pair EURCHF, +0.0584%  rallied to a session high of 1.1994 francs on Wednesday, its best level since January 2015, when the Swiss National Bank removed the floor of 1.20 it had set for the franc versus the shared currency, and instead allowed the pair to trade freely. It was staying around that level early Thursday.

Part of the reason behind originally instituting this peg was to protect the Swiss franc from being inflated as the European Central Bank gobbled up European assets as part of its quantitative-easing program. Its removal left the franc rallying to its strongest level ever against the euro, but that was short lived, as it has slowly retraced its gains over the past three years.

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Versus the franc, the dollar USDCHF, -0.0310%  is around its highest level since January of this year, buying 0.9683 on Thursday.

But despite its history of central-bank intervention, the Swiss currency was likely driven to such lows by market forces, analysts said.

“The Swiss franc was the outlier over the last 24 hours. The two ‘safe haven’ currencies seem to be responding asymmetrically to risk,” said Marshall Gittler, chief strategist and head of education for ACLS Global, referring also to the Japanese yen USDJPY, +0.05%

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“The ‘risk off’ environment pushed the yen up more than the franc, but the ‘risk on’ seems to be pushing the franc down more than the yen,” he added. This was particularly remarkable on Wednesday, on the back of the news that CIA Director Mike Pompeo secretly met with North Korean leader Kim Jong Un.

And while the U.S. dollar DXY, -0.04%  edged higher on Wednesday, its general weakness so far this year, down 2.8%, and last year, off 9.9%, may also have played a role in the franc’s depreciation against the euro, suggested strategists from Brown Brothers Harriman in a note.

U.S. sanctions on Russia-related Swiss investments also could have made a difference, as the relationship between Moscow and Washington is worsening over allegations of tampering with the 2016 U.S. presidential race and Russia’s support of Syrian President Bashar al-Assad after a suspected chemical-weapons attack in Syria.

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On top of that, while net shorts in the Swiss currency have been lingering around for some time, the fact that they haven’t been ramping up aggressively suggests there might still be some more room for Swiss weakening, Gittler suggested.

ACLS Global

“The euro is a more significant alternative to the dollar than the franc, and Swiss officials have clearly signaled their intention to lag behind other central banks in normalizing monetary policy,” according to BBH note read.

And indeed, SNB President Jordan said last week that he didn’t want to spark a sudden appreciation in the franc. An interest-rate hike commonly leads to appreciation of a currency. The central banker also said that normalization elsewhere—i.e. in Frankfurt, where the ECB is located—would be advantageous for Switzerland, as it would give the SNB room to maneuver.

Also weighing on the franc could be the “‘Vollgeld Initiative’ referendum on June 10—a contentious, and potentially detrimental, national vote on whether to abandon the current fractional-reserve banking system,” said Viraj Patel, FX strategist at ING. Both the Swiss finance ministry and the SNB are against the proposal, saying it would jeopardize Switzerland’s growth and prosperity.