Geographically[i], the United Kingdom and the Swiss Confederation couldn’t be more different. The U.K. is famous for being the Island nation of the North Atlantic; Switzerland for being the landlocked nation of the Alps. Switzerland has few natural resources: hydropower, timber and salt, and 10% of its land arable, whereas the U.K. is rich in fossil fuels, industrial and precious metals; 25% of its land arable. Switzerland prides itself on its isolationist pacifism; the U.K. on its history of far reaching economic and maritime and dominance.
Why then should GBP/CHF be a standout currency pair? The obvious thing to do is to compare trade, trade partnerships, currency stability and any economic relationships.
Guest post by Mike Scrive of Accendo Markets
According to the WTO[ii] the U.K. ranks 8th in merchandise exports, 6th in merchandise imports, excluding intra-EU trade. In commercial services, it ranks 2nd in exports, 5th in imports. The U.K. accounts for 2.88% of total global exports and takes in 3.47% of total global imports. By comparison, Switzerland accounts for 1.22% and 1.06% of total global exports and imports, ranking 23rd and 26th, respectively.
Switzerland relies heavily on manufactured exports, almost 88% of its total exports. The main destinations are: EU, 54.8%; US, 11.7%; China, Hong Kong and Japan, combined, for 11%. Finished goods include medical and pharmaceuticals, watches and clocks, (naturally), and specialized machinery. Manufactured goods account for almost 63% of U.K. exports, and are destined mainly to the EU, 42.9%; Switzerland 13%; U.S., 13% and China and the UAE, combined, 6.1%. According to OOEC[iii], multi-use-chemical compounds[iv] account for 15% of the UK’s exports to Switzerland, followed by jewelry, 11.07% and cars, 10.37%. Switzerland major exports to the UK include packaged medicaments, 17.32% and finished silver and gold products, accounting for a hefty 21%. Interestingly, paintings, jewelry, and precious metal watches account for almost 19%. In March of 2015, total U.K. exports[v] increased by 3.2% mainly in the categories of pharma, vitamins, diagnostics, immunological products and medications. The U.K.’s trade deficit decreased mainly due to an increase in materials manufacturing and chemicals specifically medicinal and pharma products. Hence there is indeed a reasonably active trade link between the UK and Switzerland, particularly in intermediate pharmaceuticals products and chemicals.
The Swiss National Bank[vi] follows a strategy of maintaining price stability, measuring medium term inflation, and setting a target for base lending rates. The overnight repo rate is -0.74%, the 3 month Franc LIBOR at -0.79 and the current yield on the 10 year bond, 0.06%. The Swiss economy is not threatened by inflation, but rather as its reputation as a ‘safe haven’. The SNB claims the current low rate policy is designed to defend the Franc from excessive demand. The Bank of England’s most recent inflation rate has been measured at 0.0% while its target inflation rate is 2.0%. The current bank rate is positive 0.5% and the BOE is still engaged with its bond purchasing program totaling £375 billion to date. Neither the BOE nor SNB are signaling rate increases. On 13 May, the BOE reduced its growth forecast to 2.5% for 2015 and to 2.6% for 2016; the initial projections were for 2.9% annualized growth for both 2015 and 2016, respectively. Similarly, the SNB expects consumer prices to decrease 1.1% in 2015. Recent retail sales indicated a decline of 4.6%, the largest decline in over a decade.
Earlier this year, the SNB unexpectedly decoupled from the Euro creating havoc in FX markets. Up until that time the Franc was gradually weakening against the Pound Sterling. From mid-May 2013 until mid-January 2015 GBP/CHF traded in a range from 1.4047 per Pound to the high of 1.55475 per pound on 15 January 2015. On that volatile day, GBP/CHF declined 18.42% to a 52 week low of 1.26 francs per Pound Sterling, decisively breaking the long, steady Euro pegged trend.
In the week following the SNB action the ECB announced the details of the expanded QE[vii] program, the Franc weakened and GBP/CHF recovered. At about the same time BOE Governor Carney commented on the use of QE to fight low inflation as foolish, citing falling lower oil prices as a one-off; no sooner said than U.K. February inflation data came in at 0.0%. Also, the Bank of England reported an error in foreign Gilt purchases; only half as many were purchased than first reported. At about the same time SNB Chairman Thomas Jordan commented that, “In case there is a necessity to intervene in the foreign exchange market to influence monetary conditions, we will take it” and again the Franc weakened vs the Pound to its current 1.565 per GBP.
The event analysis fits nicely within the Fibonacci retracement study. It seems to indicate that the SNB stands ready to defend the franc while the BOE may be underestimating the deflationary symptoms across the Eurozone. On one hand, negative yields or not, the Franc seems to remain a safe haven; on the other hand, the BOE may be able to stick to its 0.5% benchmark rate. Hence this may portend at least a perceived future weakening of the GBP and a test at 1.4454 CHF per GBP.
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[i] CIA Library’s World FactBook: https://www.cia.gov/library/publications/the-world-factbook/
[ii] World Trade Organization: https://www.wto.org/
[iii] Observatory of Economic Complexity: https://atlas.media.mit.edu/en/
[iv] In particular, Nitrogen Heterocyclic Compounds, an intermediate export product.
[v] Trading Economics: http://www.tradingeconomics.com/
[vi] Swiss National Bank (SNB): http://www.snb.ch/en/iabout/snb
[vii] Press release: http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html
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