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Pressure on the EUR/CHF floor intensifies – Rabobank

FXStreet (Barcelona) - Emile Cardon, CFA, Senior market economist at Rabobank, notes that additional downward pressure will be created for the EUR/CHF pair irrespective of the Gold referendum outcome.

Key Quotes

“On 6 September 2011 the SNB announced it would protect a floor at EUR/CHF1.20 to fight deflationary pressure. For the past 2 years or so, EUR/CHF has been comfortably trading above 1.20 on diminished safe haven demand for the CHF and on a strong belief in the market that the SNB would uphold its commitment to the floor.”

“Things have changed. The referendum comes at a time when EUR/CHF is trading within a whisker from the EUR/CHF 1.20 floor. Some market participants fear the SNB may dip into its EUR reserves to purchase gold. This would cast doubt on the SNB’s ability to maintain the EUR/CHF floor.”

“What’s more, geopolitical risks may increase demand for safe havens, such as the Swiss franc. Given that the outcome is highly debated, investors have also prepared for the worst and implied volatilities on option prices have risen ahead of the outcome.”

“We don’t believe the referendum will be implemented. First, the polls are suggesting that the public will not approve and second, the cantons will not accept the proposal as it could hurt future income streams from the SNB.”

“Nevertheless, even without a “yes” vote, do we expect downward pressure on EUR/CHF to intensify. Odds that the ECB will start buying government bonds in the secondary market have increased. In that scenario, the SNB will be forced to start the printing press and start buying foreign currencies, of which mainly in EUR.”

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