UBS: Pound / Swiss Franc Rate Could be Anywhere from 1.20 to 1.50 by 2017

Those exposed to the pound to Swiss Franc exchange rate should be prepared for unprecedented volatility.

The pound has been in decline against the Swiss currency since November 2015 when concerns over what the UK's vote on EU membership would mean for the economy's outlook.

The 'Brexit premium' - the difference between where the pound should be and where it actually is thanks to Brexit fears - has since grown and the GBP/CHF rate has fallen to the multi-month lows seen at 1.3743.

There could yet be more big moves to come warn analysts at UBS.

It goes without saying that the focal point of any negativity surrounding the vote will be the British pound, a currency that has moved lower again over recent days as odds for a UK exit from the European Union have grown.

The EU referendum will meanwhile put the Swiss Franc, a traditional heavyweight in the global safe-haven currency gang, near-the top of the shopping list for investors looking to avoid turmoil associated with the vote.

“Over the last few years, the Swiss franc has acted as the ultimate "safe haven" against any sort of European risks. The next big risk on the agenda is most likely the upcoming British referendum about its EU membership,” says Constantin Bolz, Strategist at UBS.

Importantly, it is not just from pound sellers that the Franc will derive its support.

The impact of a Brexit could be felt much wider than just in the UK; the whole of Europe and possibly even global financial markets could feel the ramifications.

“Should the referendum really result in a vote for the UK to leave the EU – which is not our base case – then the euro should also come under pressure, as markets would start questioning the very idea of a European Union," says Bolz.

For example, if the UK votes to leave a series of copy-cat referendum’s in other EU member states becomes a viable prospect.

If the UK leaves the EU, UBS expect the GBP/CHF to react in an extreme move lower with their projections showing the pair could reach 1.20 by early 2017.

 
It is worth pointing out, however, that UBS’s base case scenario is for the UK to vote to stay, which they say will result in the pound-to-franc appreciating to 1.50.

“In our base case, the result will be the continued membership of the UK in the EU, which should lift the exchange rate above 1.50.”

The Franc as a Hedge on Sterling-Related Currency Risks During the Referendum

According to HSBC the franc’s safety properties make EUR/CHF the ideal candidate for hedging against weakness in the pound.

In short, those who have something to lose should the pound fall will be compensated by a rally in the Franc.

"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,” say HSBC.

Instead strategists at Europe’s largest bank advocate buying the Franc which would appreciate as a result of safe-haven inflows in the case of a Brexit but, “were Brexit rejected, we would not expect maintenance of the status quo to provoke much CHF weakness," says Bloom.

Swiss National Bank Intervention is a Risk to Franc Exposure

The main risk to being exposed to the Swiss franc, however, is the possibility that the Swiss National Bank (SNB) could intervene to devalue the franc.

They have done this previously when the currency has rise sharply following global risk events and they might do it again.

This is because the SNB, like all central banks, normally try to prevent their currencies from rising too high as this reduces the competitiveness of their exporters.

HSBC, meanwhile, sees any intervention from the SNB as ultimately futile as it would only as best, be able to slow the move rather than reverse it.