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Yann Quelenn, 
Market Analyst, Swissquote

FXTM: What could be the consequences of an overvalued franc on Switzerland’s export-driven economy?

YQ: The consequences are actually already visible. Exports are suffering and one of its major flagship and economic barometer, the watches industry, is experiencing strong decline. Watches exports have globally reduced by more 16% from April last year and in particular by 14% in China and 33% in the United States. The situation is very ironic as the global risk-off sentiment brings investors to look for the Switzerland stability which in return suffers as its products become too expensive. As a result, deflation should continue in Switzerland and the economy should adjust lower. 

YQ: Unfortunately, employment and wages are definitely at stake. Swiss products are too expensive, prices need to go lower. It cannot be achieved with the current economic structure. In the case of the watches industry, the know-how has to remain in Switzerland and salaries are set to diminish… For the time being, we should see unemployment increasing.

FXTM: The Swiss economy seems more independent from the SNB than many other countries’ economies are from their national banks. Do you think this helps the SNB keep its credibility on the markets?

YQ: Switzerland is relatively open economy therefore economic conditions are driven by the global environment. The SNB can just react to it by setting up the monetary policy. If it drives to push investor out of Switzerland, the Swiss economy will definitely suffer. The assumption that the economy is independent from the SNB is incorrect. It is actually well correlated and we can see how a strong franc is not such a good news for the country. Anyway at the moment, markets remains confident that the price stability is going to be achieved. In other words, either a collapse of the euro or a recovery could provide with some further relief to the CHF.

FXTM: If the UK decides to leave the European Union on 23rd June, how could the SNB react to confront turbulences on the financial markets?

YQ: If UK votes to leave the European Union, the upside pressures on the Helvetic currency will increase as financial markets would start pricing in a collapse of the euro. We should see a strong appreciation of the domestic currency. This is why I think the SNB is reluctant to trigger important FX intervention as it could result in massive losses. The wait-and-see approach will clearly be preferred but I also believe that protectionist measures could be implemented in terms of increasing tax of imported goods. Government should help trades with additional policy measures.

FXTM: What are your recommendations to traders regarding the in and out campaigns and potential Brexit scenarios?

YQ: First of all, financial markets have, at the moment, priced in partially a potential Brexit. This means that sharp move may further happen as expectations will adjust. In case of exit vote, there is going to be a 2-year negotiation period with the EU of a withdrawal agreement regarding the future relationship with the Union. The CHF would set to appreciate further and some actions could be taken from the SNB. If the UK votes to remain, I think there would not be major implications for capital markets except a relief rally on the single currency. Shorting the EURGBP could be a good trade as uncertainties on the EUR would not be over, other regional tensions would return to the forefront, such as the Greek bailout... Yet, irrational fears on a collapsing UK economy would fade.

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