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    CHF: Battening down the hatches – Rabobank Sandeep Kanihama

    Jane Foley, Research Analyst at Rabobank, suggests that from the SNB’s point of view, the value of the CHF had been behaving relatively well this year.Key Quotes “On almost any measure, the swissie remains a very overvalued currency but in February EUR/CHF hit is highest level since the SNB stopped protecting the EUR/CHF1.20 ‘floor’ in early 2015. In addition, the average level in the quarter to date at EUR/CHF1.10 is the firmest since last January’s shockingly sharp CHF appreciation. That said, in recent sessions the value of the CHF has risen sharply against the EUR and even more sharply vs. the GBP. Given that opinion polls continue to suggest that the UK’s June 23 referendum on EU membership could go either way, it is likely that demand for safe haven assets will remain firm and that the CHF will remain well underpinned.For a long time safe haven demand for the CHF has been the thorn in the side of both the SNB and the Swiss economy.The next SNB policy meeting is scheduled for June 16, a week before the Brexit vote. Surveys suggest that steady policy is expected by SNB watchers but further policy action by the SNB in the months ahead cannot be ruled out if the value of EUR/CHF were to dip further potentially back towards the 105.00 area. Before the SNB were to resort to another rate cut, however, a step up in FX intervention is probable.The combination of FX intervention risks and very low interest rates has had some success in chasing away FX inflows; the CHF did not perform particularly well vs. other safe haven currencies last summer after the bursting of the bubble in the Chinese stock market. That said, the ramifications of a Brexit would be mostly played out in Europe. Irrespective of the impact of a Brexit on the UK economy, its greatest legacy could be in highlighting the rifts in the EU that already exist in other parts of Europe. For this reason we have been forecasting that a ‘Leave’ vote from the UK on June 23 would also create negative pressures on the EUR.On this scenario, there is risk that demand for an alternative, non-EU European currency would spike. In view of its attractive liquidity position, the CHF can be expected to perform well in these conditions. Even on a close vote in favour of the ‘Remain’ camp on June 23 we would expect the CHF to perform well.Our published forecasts assume that the UK will vote to stay within the EU this month, but clearly there are significantly risks to this view. On a Brexit, we would expect EUR/CHF to fall hard back towards the 1.05 level initially. On a clear Remain vote EUR/CHF should be able to drift back towards 1.10.”


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