Pound-Franc Rate Could Top 1.30 as Christmas Comes Early for SNB

- GBP/CHF could see 1.30-to-1.35 range later in 2021. 
- As UK, GBP outperform and safe-haven CHF slides.
- CHF fall an early Christmas for Swiss National Bank.

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  • GBP/CHF spot rate at time of writing: 1.2917
  • Bank transfer rate (indicative guide): 1.2465-1.2555
  • FX specialist providers (indicative guide): 1.2723-1.2827
  • More information on FX specialist rates here

The Pound-to-Franc exchange rate is among the top performers in Sterling's major currency complex for 2021 but could rise to new one-year highs above 1.30 in the coming weeks as rising American and British bond yields offer the Swiss National Bank (SNB) an early Christmas.

Pound Sterling had risen 6.8% against the Swiss Franc for 2021 by Wednesday and was outpaced only by the Pound-to-Yen exchange rate in the scale of its increase, which could be set to endure for a while yet as the British unit remains at the vanguard of the reflation trade and safe-haven Franc is deflated.  

UK growth is now widely forecast to be among the fastest in the developed world this year and next after an early start vaccinating against the coronavirus, which has led market expectations for Bank of England (BoE) interest rates to rise. The UK is not the only country to see future rate expectations lifting bond yields and its currency but the BoE is perhaps the only central bank not to have pushed back against this or even indicated discomfort with it.

"I think people are realizing the Chancellor will be throwing petrol on a growth inferno in Q2/Q3/Q4 as the economy is unlocked," says Paul Robson, head of G10 FX strategy EMEA at Natwest Markets in a March research note. "Despite how far the currency’s recovery has come, we think this is a time to be adding to long Sterling positions rather than reducing them. We stay long Sterling versus both the EUR and CHF, and see GBP/USD trading up to 1.45 in coming weeks."

Above: Pound-France rate at daily intervals with USD/CHF in black. 

Even the Atlantic the Federal Reserve (Fed) has attempted to disuade investors of the notion that it could raise interest rates sooner rather than later despite that the U.S. economy is also expected to be a comparative outperformer. But expectations for UK outperformance were bolstered last week by Chancellor Rishi Sunak's extension of the furlough scheme and budget in which he recommited to earlier investment plans, which has cemented what was already a more 'hawkish' stance at the BoE.

The Pound has made little progress against the Dollar and other currencies this week while analyst expectations for it vary wildly, although generally many expect the main Sterling exchange rate GBP/USD to rise back above 1.40 in the coming weeks, which bodes well for the Pound-to-Franc rate. GBP/CHF is effectively an amalgamation of GBP/USD and USD/CHF so always closely reflects relative price action in the latter two. 

"Yesterday’s price action was a key day reversal and coupled with a 13 count, we would allow for a correction lower," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who sees USD/CHF trading near 0.9324 in the coming weeks an rallying toward 0.9668 into year-end. "We suspect that yesterday’s high at .9375 is an interim high. Above here lies the .9439 TD resistance and the 50% retracement at .9500."

GBP/CHF would rise to around 1.3020 if GBP/USD recovered 1.40 while USD/CHF traded around Wednesday's 0.93, but would reach 1.3485 and its highest since 2018 if Natwest Markets is right about the main Sterling pair rising to 1.45 in the short-term. However, these Pound-to-Franc levels would be even higher if the Swiss currency continues to retreat from the U.S. Dollar in the interim, leading to a rising USD/CHF that would also be supportive of GBP/CHF. 

Above: Pound-France rate at weekly intervals.Rises above 200-week average & 78.6% Fibonacci retracement of 2019 fall.

USD/CHF has risen 5.4% in 2021 as investors cut wagers against the Dollar and also walked away from bets in favour of the safe-haven Franc, which did well when the coronavirus closed down the global economy last year. But with the U.S. expected to be among the better performers this year, investors are being drawn back to the Dollar and away from the Franc in what is effectively an early Christmas present for the SNB.

"The sell-off in CHF is likely exacerbated by positioning. Recent reports have seen speculators shuffling to the exits with their long CHF positions – this may have turned into a stampede. The SNB will very much welcome this adjustment, removing the pressure from it to intervene and incur the further wrath of the White House," says Chris Turner, global head of markets and regional head of research at ING in an early March review of ING's forecasts. "We think the decisive rally in EUR/CHF above 1.10 represents a big vote of confidence in the global recovery – including a view that Europe will find a way out of lockdown & participate in the global expansion from 2Q onwards."

The Franc's long-lived tendency to strengthen because of global instability, or simply idiosyncratic economic weakness in places like the Eurozone, subsidises ever-cheaper imports of European and other goods that can reduce consumer prices and in the process prevent the SNB from meeting its ever-elusive target to deliver inflation of 2%. This, combined with the SNB's rejection of the quantitative easing policies that are popular elsewhere, has led the bank to become one of the most prolific currency market intervenionists and even saw Switzerland itself labelled as a "currency manipulator" during late 2020 and the last days of U.S. Treasury Secretary Steve Mnuchin's reign.

Vice Chairman Fritz Zurbrugg told Swiss news outlet Blick on Wednesday that the Franc is getting weaker due to ebbing investor demand for perceived safe-haven assets, resulting in part from vaccination campaigns across and hopes of a return to normality by year-end for many economies. He did also say the bank would continue its intervention in the currency market in response to any bouts of strength in the Fran, although the SNB may be less compelled to do this now if USD/CHF and other important Swiss exchange rates like EUR/CHF and GBP/CHF continue to rise this year.

Above: USD/CHF at weekly intervals, testing 38.2% Fibonacci retracement of 2019 fall. GBP/USD in black.    

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