FxWirePro: CHF trades ahead of Brexit vote and SNB

Over the weekend, calls for PM May to delay Tuesday’s vote on the withdrawal agreement and the political declaration have increased. A number of key parliamentary figures have publically continued to voice their displeasure with the current deal, urging the Prime Minister to return to Brussels to renegotiate. However, with the current Brexit secretary, Stephen Barclay, suggesting that the vote will still go ahead as planned, the parliamentary debate looks set to enter its fourth and penultimate day today.

Meanwhile, ahead of the vote the European Court of Justice (ECJ) will deliver its verdict today on whether the UK has the power to unilaterally revoke Article 50. The ruling follows a legal opinion from the ECJ’s advocate general that the UK had the power to halt its withdrawal from the EU.

SNB’s monetary policy is scheduled for next week. We upgraded CHF forecasts, in the recent past, to reflect both more negative global conditions (EM stress) and more favorable domestic conditions (oya GDP growth has accelerated from 1% a year ago to 3.4% in 2Q’18). 

Trade tips: 

The franc may have rather underwhelmed since we published those forecasts – the TWI has shed around 1.5%, so giving back one-third of the gains it made from mid-May to mid-September - but we are not inclined to reconsider the forecast this month as we attribute this correction to largely temporary factors (a ceasefire for EM, evidence of some smoothing intervention from the SNB, albeit very low-key if at all, and receding risks of a disruptive Brexit). 

The forecast thus continues to envisage modest appreciation in the franc, a move in EURCHF to 1.12 over the coming one-two quarters, albeit we have downgraded the risk bias from bullish to bearish as we are more conscious of the potential for the yawning rate differential between USD and CHF to generate at least intermittent interest from short-term traders to sell CHF (as may have occurred over the past month). 


The surprising context to the franc’s slippage over the past month is that it has occurred despite the ratcheting up of tensions in Italy. In the prior six months, EURCHF was more than -90% correlated to Italian credit risk. Over the past month, however, the correlation to the BTP spread has flipped to +70%. Courtesy: JPM

Stay short GBPCHF from 1.3051. Marked at 2.29%. Lower stop to 1.30.

Buy 6M GBPCHF - GBPUSD vol spread, equal-vega notional. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index has shown 140 (which is bullish), GBP is at -95 (bearish), while hourly CHF spot index was at 117 (bullish), while articulating at 13:10 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex