GBP/CHF: Caught between Brexit and Franc strength

GBP/CHF: Between Brexit and Franc strength

The Brexit Referendum is straining GBP

In just over three months, on June 23, 2016, the British people will decide whether Great Britain will remain a part of the EU or not. While euro-critics in Continental Europe are gaining in strength, insecurity about Britain’s future in the EU is on the rise. BoE confirmed yesterday that this sense of insecurity has placed considerable strain on the British economy. They have justified their announcement to not raise interest rates but keep them at a constant 0.5% by saying that “… the insecurity about the outcome of the referendum… could delay spending decisions and slow down the growth of overall demand in the near future”. In addition, it is highly questionable how Britain’s exit could be implemented in practice and what consequences such a decision would have on capital inflows. So far, these inflows have balanced current account- and fiscal-deficits. It is doubtful that capital inflows would remain to a similar extent high, should Britain exit the EU. Lengthy negotiations over the next few years about the exit and resulting insecurities would entail a further, even more severe devaluation of the pound.

CHF remains „highly overvalued“

In the past week, Mario Draghi has surprised markets once again. After a brief subsequent fluctuation of the EUR/CHF, it has meanwhile returned to the same level as just before the announcement. This is sufficient for SNB, which confirmed the historically low interest rate yesterday, to state that the “Swiss Franc remains considerably overvalued” and that, if necessary, it will make further interventions to weaken the Swiss Franc.

GBPCHF – a safe bet?

Is a Brexit likely? We believe it is rather unlikely. The economic risks of lengthy negotiations over several years will probably see reason triumph over emotions. An indicator that proved to be accurate in the past – British bookmakers. Contrary to the predictions following current surveys, they see a distinct majority in favour of Britain remaining in the EU. There is no doubt that the Swiss Franc will have to devalue in the middle to long run. More and more Swiss companies announce redundancies and outsourcing to cheaper foreign countries. This is bound to weaken the Franc.

At present, the GBP/CHF is listed at a low level of 1.40. If a Brexit can be avoided, we could rapidly climb back to a level of 1.55 GBP/CHF. If the Franc continues to devalue, this level should also be broken.

However, until the referendum further fluctuations are to be expected.

 

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