The referendum on the SNB’s gold reserves held the weekend delivered a clear result – the Swiss people do not want the Swiss National Bank (SNB) to hold more of the yellow metal. A win for the Yes camp (who would have forced the SNB to hold 20% of their assets as gold) could have caused a massive headache for the SNB. However, even though this risk has now been eradicated, the market has not eased pressure on the CHF’s safe-haven status.
On the back of the referendum result, EURCHF has backed away from recent highs at 1.2040, and has lost some 15 pips already, at the time of writing EUR/CHF is a mere 25 pips away from the SNB’s 1.20 peg. Even though election risk has been removed, the strong Swissie could be here to stay.
What is driving the Swissie higher?
The Swiss authorities may desperately want to avoid a stronger franc, but the economic environment seems to be against them. Interestingly, falling oil prices could be a thorn in the side of the SNB for some time, as it threatens other countries with deflation and could lead to some central banks such as the ECB embarking on further accommodative policy action.
It could also leave the pound vulnerable versus the Swissie, as fears about falling prices have also hit UK shores, making it likely that the BOE will delay hiking interest rates for some time.
GBPCHF: the technical view
Rather than look at EURCHF, which is hovering just about above the 1.20 peg, we prefer to look at GBPCHF which has backed away from recent highs and is now testing 1.5092 - the 200-day moving average, a critical level of support. If we fall below this level then it opens the way to 1.50, then 1.4943 – the low from 19th November, and back to the April/ May lows around 1.4800.
GBPCHF has bounced off the 200-day sma on Monday, however, we think that upside potential is limited and a downtrend is forming. Unless we get above 1.5250, recent highs, in the near term, which would negate our view on further losses for GBPCHF then we could see this pair breach its 200-day sma support and re-test prior lows.
SNB intervention risk:
We believe that the SNB will have to take further action to stem CHF strength; however, we don’t think they will do so before the end of the year, which is why we believe there is room for further downside in GBPCHF.
A caveat to this is if the ECB decides to embark on QE at its meeting this week. If that happens then we could see EURCHF crash through 1.20 forcing the SNB to take action to limit CHF strength, which could fatally disrupt the GBPCHF down trend.
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