EURCHF: Knocking on the SNB's Front Door at 1.20 Floor Street

I’ve had November 30th marked in my calendar for months now (it’s my wedding anniversary), but now FX traders from around the globe are starting to place a big red “X” on the day. That’s because Switzerland’s population will vote on a key referendum that day, with potentially huge implications for global markets: Swiss voters will decide whether the Swiss National Bank should increase its holdings of gold from 8% of FX reserves currently to 20%.

According to SNB Chairman Jordan himself, an approval of the gold referendum would force the central bank to buy CHF 70bln worth of gold based on the size of the current balance sheet and “would make monetary policy measures more costly than they are now.” Purchases of this scale would obviously have a big impact on the gold market, but the implications for EURCHF are even more significant. In essence, the central bank would be forced to choose between buying massive amounts of (likely appreciating) gold, printing massive amounts of currency to defend the peg in the process, and simply giving up on the peg, likely taking EURCHF down to 1.15 or 1.10 (or lower) in short order. Implied volatility in EURCHF is already rising, suggesting that traders are growing increasingly uneasy with the upcoming vote.

One way or another, uncertainty surrounding the EURCHF is likely to pick up the closer we get to this critical vote, especially with the pair already within 20 pips of the SNB’s floor.

Technical View: EURCHF

As we go to press, EURCHF is testing a 2-year low at 1.2020, within striking distance of the EURCHF floor at 1.20. For now, the market appears relatively sanguine about the risk to the floor, with traders heavily long the pair, but the positioning data also suggests that a temporary break or permanent removal of the floor could lead to a violent drop as traders rush to exit this crowded trade all at once.

From a traditional technical perspective, the pair remains within its prolonged downtrend, with bearish trend line resistance and the 50-day MA looming in the 1.2070-90 zone. Meanwhile, the RSI indicator is approaching oversold territory, raising the probability of a short-term bounce.

In our view, the SNB will likely continue to defend the floor until the vote, but if the referendum succeeds (still seen as unlikely at this point), all bets are off. Therefore, nimble bulls may consider short-term opportunities on forays toward 1.20, but it will be increasingly critical to watch the headlines coming out Switzerland in the coming weeks.