Swiss Franc Forecast to Fall Against Pound Ahead of Central Bank Meeting

• GBP/CHF's chart is showing a bullish bias ahead of the SNB meeting on Thursday.
• HSBC suggest buying the Swiss Franc as a hedge against Brexit

The formation of a reversal pattern on the weekly chart of the pound to franc exchange rate is indicating sterling could rise over coming weeks.

The chart is showing a two-bar reversal pattern which is characterized by a longer-than-average down-bar followed immediately by a similar length up-bar, which ‘reverses’ the losses of the previous period.

The pattern occurs at the end of down-trends in the bear to bull reversal variety.

On the daily chart the pair is rallying within a descending channel.

It has just reached the upper boarder of the channel just below where the 50-day MA is situated and it could reverse from here and begin moving lower back down inside the channel, however the bullish two-bar pattern on the weekly chart augurs more upside for the exchange rate, increasing the possibilities of a breakout from the channel, higher.

As such a break well above the 50-day moving average and out of the current descending channel, confirmed by a move above the 1.4350 level, would probably reach as far as the R1 Monthly Pivot at 1.4525.

This is closer to J.P Morgan’s end of Q2 forecast of 1.4400.

Swiss National Bank (SNB) on Radar – Potential Catalyst?

The highlight of the week from a fundamental perspective will be the meeting of the SNB on Thursday March 17.

Whilst their base case is for no-change, J.P Morgan argue there is a chance the SNB could change the ‘exemption criteria’ for bank deposits subject to their negative deposit rate, in order to support the weakening of the Franc. This would also marry well with the bullish bias of the GBP/CHF technical analysis above. 

Changing the ‘eligibility criteria’ for deposits would probably involve changing the rules around the amount a bank can deposit with the SNB without incurring the negative deposit rate.

The SNB would be aiming to weaken the Franc by making more of a bank’s deposits eligible for the negative deposit rate. Currently only 37% of deposits are subject to the SNB’s negative deposit rate. Increasing this would encouraging banks to remove more of their ‘savings’ and lend it to the wider economy, increasing the amount of Francs in supply and thus diluting their value.

This has been described by analysts as a “nuclear option”:

“Many regard the removal of exemptions as the SNB’s nuclear option - this is an exaggeration, albeit it would likely amount to a de-facto 20-25bp rate cut (i.e. without exemptions the overnight rate should converge from -50bp or so towards the -75bp sight depo rate).” Observe J.P Morgan team.

However, they go onto dismiss the likelihood of the SNB opting to do this, because banks would be more likely to pass the negative rate cost on to customers, which the SNB would not wish to encourage:

“SNB president Jordan has aired the possibility of a change in sight deposit exemptions if needed, but we suspect the bar for action here is high as it is likely that the SNB will still wish to cushion domestic savers from a negative rate policy that was designed explicitly to penalise non-residents.”

Morgan Stanley do not explicitly state whether they expect the SNB to announce any further easing on March 17 simply stating ambiguously that:

“We expect the SNB to continue to state that CHF is overvalued and remain accommodative.”

Outlook for Flows favouring Swissie Appreciation

J.P Morgan identify two major sources of Swiss Franc demand which they expect to impact on the exchange rate in the short-to-mid-term.

These include a whapping inflow from mergers and acquisitions, accounting for 6% of GDP, and further inflows resulting from the Polish government's mortgage conversion plan:

“Last month we identified two potential sources of capital inflows which together could boost CHF demand by 11% of GDP. Firstly, there is a large outstanding M&A inflow which at 6% of GDP would offset the entire net M&A outflow from last year. That transaction is scheduled to complete in April subject to regulatory approval and it is possible that investors might wish to hedge their FX exposure ahead of that date. Secondly there is the potential for Poland to implement a mortgage conversion plan – outstanding CHF mortgages in the country amount to CHF 34bn, or 5% of Swiss GDP.”

Still a Safe Haven

Another factor in the Swiss Franc’s value is investor demand for the currency in times of risk aversion.

This risk-off inflow continues despite negative bank rates and the current negative yield on Swiss sovereign bonds, making the idea of parking money in Switzerland less attractive, and actually marginally costly to investors.

With the possibility of a global crisis still present, China still slowing down, and the clearer danger of a Brexit leading to a mini-crisis there are still manifold upside risks to the outlook from a risk demand perspective for the currency which need to be factored in to any analysis.

CHF as a Hedge Against Brexit

Strategist David Bloom at HSBC has said being 'long' on the Swiss Franc may form the best hedge against Brexit.

"It might be tempting to sell GBP as a hedge, but the problem is that if Brexit were rejected, GBP would rally strongly, making the hedge a potentially expensive exposure," explains Bloom.

It is sugggested the CHF would likely rally on Brexit given the political and European-centric nature of the crisis.

The SNB may intervene, but we believe it would only, at best, be able to slow the move rather than reverse it.

"However, were Brexit rejected, we would not expect maintenance of the status quo to provoke much CHF weakness," says Bloom.