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The Pound to Franc (GBP/CHF) up 0.70% this week, if sustained, it would make for the biggest weekly gain since May.
It looks like it wants to rise into key resistance at 1.08: zooming out a bit, we are still caught in a relatively tight consolidation phase, common to all Franc exchange rates, that shows 1.08 is the top of the range and 1.0666 the bottom.
At this stage, a breakout above 1.08 would require a significant impulse, and in this regard we are watching the ongoing Swiss-U.S. negotiations closely as failure to secure a deal could provide that impulse.
Above: GBP/CHF at daily intervals.
Such an outcome could trigger the weakness that many CHF buyers have long been looking for.
Failure to reach a deal will harm Swiss exports, a major leg of CHF strength over the long term.
“The U.S. remains Switzerland’s largest single-country export destination and a significant drop in receipts presents a case for significant derating of the currency,” said a note out Monday from Bank of New York.
For now, the market senses that a deal will be done, which would limit any major GBP/CHF upside.
However, analysts at Bank of America warn on Wednesday: “The market appears to be complacent, believing that a deal will be struck in line with precedent of other negotiations. We see risks in this view – there have been no indications that the US is willing to concede.”
The Franc is a safe-haven, meaning it also tends to appreciate during time of market stress and fall during calmer conditions. However, failure to reach a Swiss-U.S. deal is probably not going to trigger the kind of negative market reaction that would bolster CHF.
This is because it is a relatively isolated case of a small country not being able to reach a deal, while the majority of the world’s major economies have reached deals. Broader market contagion risks are therefore low.
This makes failure to reach a deal a genuine idiosyncratic risk for the Franc.
Even if a new accord is reached, global markets could continue to steadily rise during August, which also helps GBP/CHF higher.
Big risks to this view include a Swiss-U.S. trade deal triggering an unwinding of CHF risk premium, pushing GBP/CHF lower. For now, we don’t think the move would be massive.
A more significant risk for GBP/CHF would be U.S. inflation expectations surging, which would boost the CHF store of value status (it acts like gold in this regard).
And remember: the bigger, multi-year trend of CHF appreciation is intact, meaning that ultimately, over a multi-month timeframe, the Franc should test new highs.
