SNB: A Midas Touch To Hold The Floor

This coming Sunday the hotly debated referendum “Save our Swiss gold” will be held.

Latest polls show that support for the “no” vote had risen,  notably EURCHF is trying to hold at a safe distance from the much lauded 1.20  SNB backed floor.

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However, over recent sessions the drag towards the lower end has increased again. Are some market participants still hoping for a victory for the supporters? The market surely cannot exclude a “yes” vote. The recent lead of the “no” vote wasn’t conclusive, in particular as the number of voters still indecisive was significant.

What would the market have to expect in a case like that?

Once implemented the initiative would limit the Swiss National Bank’s ability to act. For that reason the market reaction in case of a positive vote would be considerable and EURCHF would be very likely to retest the area of 1.2010 and likely make a very stern challenge on the 1.20 floor.

Any attempts to speculate on the 1.2000 level being breached are likely to fail miserably though, as the demands of the gold initiative would not be implemented immediately.

Instead the SNB would have a few years to increase its share of gold reserves to 20% (and keep it there). It is therefore neither courageous nor particularly clever to be betting on a breach of the minimum exchange rate now.

While the SNB’s ability to act is not yet limited, and that will not be the case in the days following the referendum, it will defend the minimum exchange rate. That means massive CHF sales on the part of the SNB have to be expected in the area below 1.2010. The market view is it is more likely that the referendum will be rejected and in that case EURCHF is likely to trend back above the 1.2030 mark on its own account.

Looking at previous Swiss Referendums, it is typical for the support behind “populist” initiatives to falter in the weeks prior to the vote. In the past some polls have shown support for “populist” initiatives (that did pass) to be +5/+6% over the 50% level, but then they only passed with a slim margin, highlighting that at these levels the gold initiative is unlikely to go through.

From the  SNB‟s weekly sight deposits data on Monday there was no meaningful shift in the level as in the periods of their frequent interventions prior to September 2012, so perhaps at these levels the SNB is not yet intervening. The forthcoming release of weekly sight deposits data, scheduled every Monday, should attract more market attention for the time being though. After the Gold Referendum result is known (30th November) the sight deposits data and central bank meetings should be the focus when it comes to Switzerland.

The focus for CHF should now slowly shift away from the Gold Referendum and towards the upcoming ECB meeting (4th December) and the SNB’s quarterly meeting (11th December).

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On the basis we anticipate the YES vote to fail to garner sufficient support we prefer to play the outcome via the headline pair USDCHF using any profit taking post referendum to add to long USDCHF exposure, this trade also works nicely as the market shifts focus towards the ECB meeting later in the week where all eyes will be on Mario Draghi and the potential for the ECB to increase their balance sheet further to stave off further growth concerns and the threat of deflation in Europe.

This should support the USD and attract buyers at key USDCHF support levels .95/.9520 and secondarily at .9330/50  which is where we will look to increase long USD exposure. However, as a final note we would caution on over extending on position size as COT data highlighted that last week USD longs were at their highest levels in the last 52 weeks.

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