Similarly to the Scottish independence referendum in 2014, markets are starting to get nervous two weeks from the Brexit vote. A single poll by an independent newspaper showing 55% in favour of Brexit, was enough to spur doubt among investors. The volatility on European markets spiked up and oil fell 3% last Friday. The EUR/CHF is also particularly affected with 1 month implied volatility reaching the highest level since the summer of last year.
With the sterling volatility hitting historic highs, investors might turn on the euro to hedge the Brexit risk, which should keep the common currency under pressure for the next 2 weeks. The SNB could be intervening in the FX market in order to temper the volatility on the EUR/CHF which hit a new low since February, however it is unlikely to announce any change to its monetary policy at their monthly meeting on Thursday.
A vote to leave the EU would clearly send the Franc strongly higher, forcing the SNB to intervene heavily, and potentially cutting the deposit rate further. And even then, the appreciation of the franc might get out of hands. The SNB foreign currency reserve is already at record high, and the effect from the negative rate is diminishing. Indeed we have seen nominal and real yields falling globally due to deflationary pressure, making the franc less and less “unattractive” compared to other currencies. It is the reason we have seen the franc fairly strong, despite the recent risk rally and near all-time high on US markets.
A “no” vote to the Brexit referendum will bring some relief on the franc and is obviously the preferred outcome for Switzerland. However for a lasting effect, inflation will have to pick up (to increase yield differentials), regardless of what the SNB does. Nevertheless in such a scenario, we would expect global inflation to increase towards the end of the year with resumption of investor/consumer confidence on the UK and the EU, the stabilization of commodity prices (especially oil) and rising wages in the US.