Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-muc-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rote.
Article / 17 June 2016 at 2:55 GMT

Swiss franc likely to become Brexit's collateral damage

Managing Director / Technical Research Limited
New Zealand
  • The SNB said Brexit may cause uncertainty and turbulence to increase 
  •  But the fallout could match that of when the EURCHF peg was abandoned
  • The Swiss franc may become collateral damage following Brexit 
  • A cut to the deposit rate, perhaps to minus 1.00%, is needed sooner rather than later 

By Max McKegg

Ahead of next week’s Brexit vote, safe-haven flows are moving into the Swiss franc, adding to upward pressure caused by declining bond yields worldwide and a US Federal Reserve retreating to the sidelines. Yesterday’s quarterly monetary policy assessment from the Swiss National Bank acknowledged the risks around the situation, especially as the exchange rate is already “significantly overvalued” and needs to decline if the Bank is to have any hope of meeting its 2% inflation objective. 

Tough situation ... safe-haven flows are moving into the Swiss franc ahead of Brexit
putting upward pressure on it. Photo: iStock

As shown in the chart below, the SNB’s inflation forecast for the next year has risen compared with that given in its March policy statement “principally due to the increase in oil prices in the intervening period”. However, according to the Bank’s model, this effect “vanishes” mid next year and the inflation track for 2018-19 reverts to its previously estimated path. The Bank says the medium-term outlook is consistent with inflation expectations surveys. 

The three-year ahead forecasts assume Swiss Libor remains at minus 0.75% during the entire period.
 Source: Swiss National Bank

Consistent with previous statements, President Thomas Jordan emphasised that the SNB’s monetary policy is based on two key elements: negative interest rates ( “an absolutely essential instrument at this point in time”) and a willingness to intervene in the foreign exchange market. 

The Bank’s determination to reduce the attractiveness of Swiss franc investments – both to domestic and offshore investors – is illustrated in this chart of the Confederation bond yield curve. Today the 30-year dipped into negative territory, giving Switzerland the dubious honour of negative rate champions. 

This situation is unlikely to change in the foreseeable future: the target range for 3 month Libor is being maintained at minus 0.25% to minus 1.25%. As of now it’s sitting right in the middle.


Source: Bloomberg

On the currency front, the SNB will be chagrined that Brexit-induced safe-haven flows are threatening to undo the positive developments since the 1.20 EURCHF peg was abandoned in January 2015. 

As this chart shows (click to enlarge), the effective exchange rate, also known as the trade-weighted-index, had been drifting down until recently. But with German bund yields still falling, a US Federal Reserve backing away from rate hikes and the UK threatening to leave the European Union, Swiss franc deposits have become more attractive on a relative basis.
Source: Bank for International Settlements, Metastock

What can the SNB do about it ? Firstly, it can keep its fingers crossed the Brits won’t score a massive own goal by voting “Leave” next week. But even if sense prevails, developments in other financial markets will keep upward pressure on Switzerland’s exchange rate. 

Yesterday the 10-year government bond yield in AAA-rated Australia dropped under 2%, dragged down by global forces. So far the Swiss yield curve has moved in sympathy and, incredibly, 50-year Confederation bonds may soon offer a negative return. But to keep ahead of the pack the SNB will soon have to start manoeuvring its Libor rate closer to bottom of its minus 0.25% to minus 1.25% target range.

The alternative is to up the ante on FX intervention. But, as this chart shows, sales of CHF in exchange for foreign currencies are already on a steep trajectory; indeed to such an extent that the SNB's balance sheet is now almost the same size as the entire Swiss economy.

Source: ABN Amro

The SNB’s monetary policy assessment said Brexit “may cause uncertainty and turbulence to increase” in already fragile financial markets. That may be an understatement: the fallout could, in fact, match that of January 2015 when the EURCHF peg was abandoned. 

But with interest rates already the lowest in the world and a balance sheet bloated by previous FX interventions, the SNB is not in a position to offer much resistance to the Swiss franc becoming collateral damage. And given the global situation, even a “Stay” vote in the UK next week will not take the pressure off the SNB for long. 

A cut to the deposit rate, perhaps to minus 1.00%, is needed sooner rather than later or the Swiss franc’s recent rally will accelerate.

– Edited by Gayle Bryant

Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade or article then click here or post your comment below to engage with Saxo Bank's social trading platform.
Patto Patto
good analysis of the situation....
Max McKegg Max McKegg


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail