Pound-Franc Rate Outlook: Mixed Signals Abound
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- GBP/CHF breaks out of base of 'box pattern'
- Outlook neutral and dependent on further confirmation
- Main driver of Swiss Franc is global risk appetite
The Pound-to-Franc exchange rate is trading at around 1.1910 at the time of writing after falling 1.12% so far this week amidst the ongoing move lower in the politically-charged Pound Sterling.
Concerning the outlook, the 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair has recently broken down out of the ‘box pattern’ it was trading with and this could herald a continuation lower.
The break down from the box pattern indicates a probable move to the downside of an equal distance to the height of the box extrapolated lower, which, in this case, suggests a down move to the 2016 lows at 1.1790.
Yet there is also a risk of a recovery since the pair has been trending higher since the August 12 lows and there is still a risk this uptrend could eventually take over again and push the exchange rate higher again.
As such we still see a short-term potential for a rebound and a break back above the range highs leading to a move up to a target at 1.2270 and the level of the January lows.
The daily chart shows how the pair recovered in August after the previous entrenched, longer-term, downtrend.
There is a possibility the downtrend could be resuming at the moment and the exchange rate could fall all the way down to the August 12 lows at 1.1675 in the medium-term.
Alternatively, there is also a possibility the pair could continue its recovery and break above long-term resistance at the January lows to push up to a target at 1.2400.
The weekly chart shows how the pair peaked in April and then started a medium-term downtrend until it bottomed in mid August.
The rebound from the August lows has seen the market rise in three up-weeks in a row until the current week when the pair started to weaken again.
It is unclear yet whether the recovery will push higher or the downtrend resume and push lower. We are in neutral territory seen on this timeframe.
A more persistent recovery could see the pair rise up to a longer-term target of 1.2700.
If the downtrend resumes and pushes below the August lows, however, the next target would probably be in the region of 1.1500.
The weekly chart is used to give us an indication of the outlook for the long-term, defined as the next few months.
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The Swiss Franc Hostage to Global Investor Sentiment
The main drivers of the Swiss Franc are likely to global risk trends and Swiss GDP out on Thursday.
The Swissie is currently finding support as stock markets sell-off and investors seek safety in havens including gold and the Swiss Franc.
Barometers of risk such as the S&P 500 stock index, which is down 27 points, and gold which is up by $23 an ounce, at the time of writing, are reflecting a worsening of the global trade relationship between the U.S. and China.
The negative sentiment has been put down to news reports that the U.S. and China cannot agree on a date for trade talks previously scheduled for September. China has also issued a complaint against the U.S. to the World Trade Organisation about the U.S.’s increased tariffs.
Other major global risk factors which could impact on the Franc include Brexit in the UK. Members of the UK’s parliament returned from their summer break on Tuesday and promptly decided to table a motion to prevent the possibility of a no-deal Brexit. Tonight at 6.30 BST they will vote on a law which if passed would make it unlawful for the UK to leave the EU without a deal on October 31.
A ‘no deal’ outcome is still possible despite MP’s trying to legislate against it. If they fail and it becomes more likely the UK will leave on October 31 the Swiss Franc will almost certainly see gains as risk markets adjust.
As things stand, however, it looks likely that parliament will be successful in blocking a ‘no-deal’ and if so risk aversion and the Franc are likely to fall. The next step after that would be a probably general election.
Seasonality could also impact on the Swiss Franc as traditionally risk aversion tends to peak in late August and early September suggesting the Franc may start to lose ground after the current period.
The Franc may be impacted by GDP growth data scheduled for release on Thursday. Current forecasts are for GDP to rise by 0.4% in Q2 compared to Q1 and 1.0% compared to a year ago when the data comes out at 1.45 BST.
This would represent a slowdown from Q1’s figures which showed a 0.6% and 1.7% rise respectively. A deeper-than-expected decline might weaken the Franc on release as it could increase the chance that the Swiss National Bank (SNB) would intervene to support flagging growth.
SNB Chairman Thomas Jordan could also impact on FX markets when he speaks on Friday at 12.00 BST. Investors will be especially keen to see what he says about monetary policy.
The SNB usually follows the European Central Bank (ECB) in its policy so as to keep the Franc competitively devalued against the Euro. The ECB is expected to ease policy at its September 12 meeting which would normally suggest a similar move by the SNB to cut Swiss interest rates, however, rates are already deeply in negative territory at -0.75%, and some say they cannot be cut any further, leading to a dilemma for the SNB.
“The Swiss National Bank’s negative interest rate of minus 0.75% is at a “pain threshold” and a further rate cut to minus 1% could prompt savers to withdraw funds from their bank accounts and store cash at home, a senior Swiss private banker said,” says Jan Dahinten, a reporter for Bloomberg .
Direct intervention by the SNB to devalue the Franc is another option. However, this is problematic given how close the Swiss already are to be labeled ‘currency manipulators’ by the U.S. authorities and attracting punitive sanctions. They have already fulfilled 2 of the 3 criteria and intervention would fulfil the third criteria.
Further signs the Franc may be getting too strong may have come in the form of statistics from the Romanian property market, where CHF denominated mortgages have fallen by 20% recently. Eastern Europe has often been a popular destination for Swiss mortgages because of volatility in the local currency.
“The number of people with loans denominated in Swiss Francs decreased by almost 20 percent in the first half of this year, from 24,315 at the end of June 2018, to 19,484 at the end of June 2019, according to the National Bank of Romania (BNR),” says Aurel Dragan, of BR Business Review.
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