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Swiss Franc Sold, Sterling Bought as GBP/CHF Draws Interest amid Rising Hopes of a Brexit Deal

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  • GBP/CHF spot rate at time of writing: 1.1880
  • Bank transfer rate (indicative guide): 1.1464-1.1547
  • FX specialist providers (indicative guide): 1.1702-1.1773
  • More information on FX specialist rates here

The Pound-to-Franc exchange rate rose on Thursday but could have much further to climb in the event that a Brexit trade deal is reached in the coming weeks, which has led Credit Agricole CIB to tip GBP/CHF as a buy. 

Sterling edged higher against the Franc Thursday but has mostly been deprived of the recovery afforded to other currencies amid an ebbing of safe-haven demand in recent months, and the ongoing Brexit saga is squarely in the frame for its underperformance. 

The Pound-to-Franc rate was crushed in late February and March as the coronavirus advanced across the European continent, closing down economies and lifting demand for the safe-haven Swiss currency along the way, but the lingering risk of a ‘no deal’ Brexit after year-end has been a major impediment to a recovery for Sterling.

“There is a non-negligible risk that the differences between the two sides could prevent an agreement next week. That said, we believe that any dip in the GBP should represent a buying opportunity as we expect a Brexit trade deal to come in November at the latest,” says Manuel Oliveri, a strategist at Credit Agricole. 

Prime Minister Boris Johnson continues to claim a willingness to walk away should negotiators prove unable to fit square European demands for automatic access to British fisheries and an authoritative say over economic policies into the round hole of electoral demands for independence.

Above: Pound-to-Rand rate shown at daily intervals. 

Both sides instructed on Saturday that negotiators work with increased energy and vigour ahead of an October 15 European Council summit that is widely billed by British media as a walkaway point for PM Johnson.

But few in the market expect a deal by then and some say negotiators could actually take until mid-November while still leaving time for the necessary legislative procedures to be performed by year-end, which is when the transition comes to an end and the closest thing to a hard deadline that exists.

“GBP/CHF is looking very undervalued relative to a long-term fair value of 1.3000, which assumes a trade deal between the UK and the EU,” Oliveri writes in a note to clients. “Current levels in GBP/CHF offer attractive levels for market longs given that FX spot is trading below its short-term fair value of 1.2000.” 

Credit Agricole models suggest ‘fair value’ is somewhere between 1.20 and 1.60 when Sterling is stood next to the Franc, although the Pound-to-Franc rate was trading below 1.19 Thursday after having been as low as 1.16 last month. 

The bank has advocated that clients use any Brexit-inspired dips back to 1.18 over the coming day to buy the exchange rate in anticipation of a move up to 1.22 once terms of a trade pact have been agreed. 

Key to whether the bet pays off are uncertainties about if Johnson really happy to have an "Australia style trading relationship" and how far the Brussels is willing to go as it gambles with the bloc's second largest and nearest export market in order for it to retain a ongoing whip hand over British politicians. 

Above: Pound-to-Rand rate shown at weekly intervals. 

“A compromise could still be possible in our view, with the UK agreeing to follow the broad EU guidelines on state aid but retain some discretion when interpreting the rules that could grow in the coming years,” Oliveri says. "According to recent media reports, the UK has recently agreed to stricter state aid restrictions with Japan than the EU is asking for."

So far the public differences of opinion have proven too large and the clock is now ticking after Johnson refused earlier in the year to contemplate extending the transition period. But this doesn’t necessarily rule out an extension under another guise, as well as the uncertainty about the end state relationship. 

British negotiator David Frost told a House of Lords committee on Wednesday that at the very best political leaders, businesses and households will only have an “outline agreement” on the terms of the future UK-EU trade relationship when the transition period ends on December 3.

This could mean some form of extended transition is necessary and likely, potentially one billed as an “implementation period” that would be similar to the one floated as a possibility by Shankar Singham, a trade advisor who’s thought to be influential with the governing Conservative Party, when addressing the House of Commons Brexit committee in late September.

"While the issue has some symbolic significance, the fishing industry is hardly the bedrock of the UK economy, contributing around 0.12% of GDP and employing less than 0.1% of the UK workforce," Oliveri adds. "The recently signed deal between the UK and Norway that uses quotas to regulate fishery access could become a template for a similar agreement with the EU."

Above: Pound-to-Rand rate shown at monthly intervals. 

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