GBPCHF Range Developed Around Unusual Fundamentals

Trading Tip – Considering the significant reversal in underlying risk trends over the past few weeks, GBPCHF marks a striking case. Historically, the pound has held the roll of a high-yielding carry currency and the franc has played its part as a straight forward funding and risk-aversion currency. Yet, with the most recent reversal in investor sentiment, we have seen these rolls diminish (if not reverse). The Swiss currency has lost its position as a safe haven through central bank intervention while the British unit has finally turned the corner on a deep recession that has left it fundamentally oversold. For our range, this presents a threat of breakout should risk aversion revive its pace next week. Given this risk, we have to proceed with caution. For our position, our suggested entry looks for a quick spike higher (similar to the jump and reversal on Thursday) that can better charge a reversal. To better improve the odds that it is a reversal and not a slow push to a breakout, we will aim to cancel all open orders by Monday’s close. Other steps that we have taken are to decrease position size and set a notionally wide stop. The first target is well within reach and the second is set aggressively to benefit from a confirmed reversal into the broad range.

Event Risk for the UK and Switzerland

UK – Over the past few weeks, during the market-wide shift towards risk aversion, the British pound has reversed its normal role as a carry currency and taken up a positive correlation to risk aversion. This change does not suggest the sterling is necessarily a safe haven currency. Nor is it a reliable funding currency (rates will rebound sooner than later). Instead, this is an adjustment of the fundamental flows that had seen speculative capital flee the United Kingdom as its economic recovery lagged its global counterparts. However, things have changed. The UK economy has officially pulled itself out of its recession and the risk aversion has now taken over. This leaves the currency in the position of being fundamentally undervalued and there is now also an effort to unwind risky positions. This will keep the pound moving inversely to risk appetite. As for event risk, there are notable indicators ahead; but the BoE rate decision is key. Officials recently suggested they would change inflation forecasts at the next meeting.

Switzerland – While the Swiss franc bears a yield that is comparable to its Japanese and US counterparts, the currency has seemed to run astray of its role as a safe haven. In recent months, the SNB has stepped into the currency market in an effort to halt the franc’s appreciation. Furthermore, the government has diminished its clout as a global safe haven for capital by opening its books to foreign governments and leaning on its largest banks. This will continue to cloud the risk picture – perhaps long enough to highlight data.