“Swiss National Bank reaction likely” on EURCHF pair in case of Brexit, says Swissquote

Swissquote produced its weekly market report last week, which contained a very interesting perspective on the potential intervention by the Swiss National Bank should a British exit from the European Union be carried if British citizens should vote for independence in the forthcoming referendum.

The actions of the Swiss National Bank with regard to the Swiss Franc’s relationship with other pairs has been a subject that all eyes have been on since January 2015 when the central bank removed the 1.20 peg on the EURCHF pair without prior notice, causing unprecedented market volatility and seeing off some FX firms due to exposure to negative customer balances, and causing others to sustain very large impacts to their balance sheets.

The report states “For the time being, Brexit is the number one key issue for the UK (and Europe!) and recent polls are very mixed. The “remain” vote is definitely weighed down by massive debt, austerity policies, deflation and loss of sovereignty.”

“David Cameron, UK Prime Minister, is running a campaign against leave vote and he has decided to spend a £9-million on an EU propaganda leaflet explaining “Why the Government believes that voting to remain in the European Union is the best decision for the UK” continued the analysis.

EURCHF potential casualty of Brexit

The report continues to explain that a reaction could be triggered by the Swiss National Bank. “The history of pro-activity from the SNB, which currently attempt to front run the ECB, makes us believe that there could be action in Switzerland before the referendum date on the 23rd of June SNB lack policy tools to defend CHF Indeed, downside pressures on the EUR/CHF are then set to continue knowing that the European future outlook is uncertain” states the report.

“Unfortunately for the SNB, policy actions are limited. Massive expansion of the central banks’ balance sheet leaves little room for meaningful direct FX intervention (total sight deposits have increase approx. 18chf ytd). While the prospect of huge loses should the Euro head towards break-up is a risk the SNB cannot take. It is true that reducing the exemptions to negative rates may be a simple strategy but that would certainly not be a significant weapon during periods of rapid devaluation and long term effect on domestic savers are skewed to the downside. In addition, given home rate bias, deeper negative rates are likely to trigger a bank run to hoard cash rather than selling CHF.”

“Last but not least, we do not consider that entering into the same monetary policy as the ECB is not an option for the SNB as a Brexit could trigger a deeper euro crisis and ruin all their efforts to stabilize the Swiss franc” concluded Swissquote’s analysis.

Image courtesy of Swiss National Bank