Britain Threatens to Destroy 18 Months of Swiss Toil in a Stroke

  • Hedging franc strength versus euro costs most since July
  • SNB measures to curb gains were just starting to bear fruit

'Brexit': What Happens if the U.K. Leaves the EU

Once again, someone else’s crisis is threatening to make life more difficult for the Swiss.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

Ever since it abandoned an exchange-rate cap in January 2015, the Swiss National Bank has battled against the franc’s appeal as a haven, guiding the currency lower with intervention and interest-rate cuts in an effort to keep the economy competitive. The strategy is finally paying off, with the franc just posting its weakest month versus the euro since the currency limit was scrapped.

Now all that’s at risk.

With Britain due to vote on its membership of the European Union in less than three weeks, polls are showing the ‘Leave’ campaign is pulling ahead. The cost to hedge against franc gains in the wake of the June 23 referendum has surged to an 11-month high. Options protecting against a stronger Swiss currency are more expensive than for any peer apart from the yen.

“Could we see a Brexit and the collapse of the single currency? Absolutely,” said Peter Rosenstreich, head of market strategy at Swissquote Bank SA in Gland, Switzerland, who a year ago predicted that the franc would gradually lose haven status. “There’s significant weakness in Switzerland, so we know that the franc is still having a profound effect on the economic situation. They’re legitimately concerned, and they should be.”

Pressure Valve

The franc has acted as a pressure valve for global markets in the past decade, appreciating in times of stress as money flows in, attracted by Switzerland’s current-account surplus and stable legal system. It jumped almost 50 percent against the euro between the end of 2007 and September 2011 as a global credit crunch was followed by the currency bloc’s debt crisis, prompting officials to start defending a 1.20-per-euro cap on its value.

QuickTake Currency Wars

Inflows into the nation’s assets have been a long-running challenge for the Swiss, who have paid with a year and a half of falling consumer prices and an economy that’s growing at about half the pace of the EU’s.

Monday provided an early warning of what a Brexit may bring. The franc was among the biggest gainers versus the pound after three surveys showed a lead for those wanting to leave the EU. The premium on one-month options to buy the franc versus the euro over contracts to sell has increased to 2.6 percentage points, the widest since July, data compiled by Bloomberg show.

‘Tin Hat’

“Over the next three weeks, the franc is not about the SNB,” said David Bloom, London-based head of global currency strategy at HSBC Holdings Plc, Europe’s biggest bank. “If you believe the U.K.’s going to leave and there’s going to be some contagion, then it’s a very good place to go. If you want to hide under your bed and wear a tin hat, that means buying the franc.”

Bloom sees the franc surging to 1.02 per euro -- in six months if Britain remains in the EU and in “six minutes” if it votes to leave.

That would be the strongest since shortly after the cap was abandoned, when it surged as much as 41 percent, and up 7 percent from the current level of 1.0964 francs.

HSBC sees the currency climbing as turmoil elsewhere makes Switzerland a target for investment regardless of the U.K. vote. The bank is the most bullish of more than 50 forecasters surveyed by Bloomberg, whose median estimate is for the franc to remain little changed by year-end.

If Britain does vote to leave, and the crash in the pound and euro that many strategists anticipate happens, then Switzerland -- which is outside the EU but borders the trading bloc -- is the natural place for money to escape to.

Double Danger

Selling the franc to curb its gains means the SNB has amassed record foreign-exchange reserves -- much of them in euros. That makes a Brexit a double danger for Switzerland: the value of its foreign holdings may fall, and a stronger currency may make exports less competitive and keep prices depressed. The Swiss central bank published data Tuesday that showed foreign reserves rose to 602.1 billion francs ($623 billion) in May.

SNB President Thomas Jordan has repeatedly said the franc is “significantly overvalued,” and Vice President Fritz Zurbruegg said in an interview with Basler Zeitung that further rate cuts are possible. He also said the central bank has long factored a potential Brexit into its monetary planning.

“This is one of the main worries for the SNB,” said Esther Reichelt, a Frankfurt-based currency strategist at Commerzbank AG, Germany’s second-largest bank, which predicts a rally to 1.07 per euro this year. “Everybody’s fearing an inflow into the safer currency havens if we indeed have a Brexit result. Definitely the SNB is keeping a close eye on the franc.”

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