EconomicReason

Under normal circumstances, there is no compelling reason that EURCHF and the Shanghai Composite Index should be correlated. Under normal circumstances, the correlation shown in the figure below could thus be dismissed as so-called “spurious correlation“.

However, circumstances are probably not normal. Both depicted variables might be driven by speculation and might therefore be caused by the same phenomenon: high global liquidity and low perceived risk. It is pretty sure that the Chinese stock market is in bubble territory. Furthermore, it cannot be ruled out that the Swiss franc is also in a (negative) bubble. The Swiss franc has always functioned as a safe haven currency, its value being positively correlated to perceived risk. Low perceived risk could explain the recent weakness of the Swiss franc and could have triggered a speculative bubble, fueled by carry trades.

The Swiss National Bank is now between a rock and a hard place. Its monetary policy strategy, which is similar to inflation targeting, does not leave room for pricking bubbles. However, the longer the bubble is allowed to grow, the larger and more painful might be the following readjustment.