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EUR/CHF at good price for “no” view in Swiss Gold Referendum theme

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It has been a heavy week for the EUR/CHF. As the propagandas for the Swiss Gold Referendum gain pace, the leveraged FX flows and put options weigh on the EURCHF spot markets. The 1.20 floor is dangerously at target. The BNS did not intervene to cool-off the pressures at the time of writing but the intervention risk is not ruled out depending on how low traders will push the EUR/CHF. The interest rate futures consolidate above par, hinting at the surge in negative rate speculations.

The collection of votes has already started, the results will be published on November 30th. All seven political parties stand sharply against the initiative, except the UDC – Union Démocratique du Centre – which indeed came up with the idea that the SNB should keep 20% of its reserves in physical gold. As we move on, news reveal that UDC’s central committee is also in the “no camp” (35 no votes vs. 34) while in the Parliament, less than 50% of UDC representatives are in favor of a “yes” vote. This situation is nothing new for the UDC, the party is regularly subject to divergent opinions regarding economic subjects. Although the UDC pretends to be the Central Democratic Union, the party is rather known for its right-tendency opinions and most often attacked on its extreme right purposes. However, the paradox in the heart of the UDC is an important signal for the Swiss voter: even the instigators of the project are not sure that this is the right direction to go. For the UDC President Toni Brunner, the differing opinions are nothing else than a sign of healthy democracy. He insists that the proportion of “no” voters in UDC remains small.

Originator Committee play on national feelings

The UDC supporters at the origin of the initiative base their propaganda on heavy nationalist arguments. “Following the massive pressures exercised by Americans, we have all of a sudden declared that 1550 tons of our reserves were excessive” argue instigators, and liquidated this quantity at “miserable” price. “This should never happen again. Gold is not a Monopoly currency at disposal of politicians and bankers. The product of past generations hard work belongs to the population.” The originators also express their disapproval to hold foreign debt as “investment”. These holdings are said to be “not real values”.

In opposition, the government and a clear majority of Swiss Parliament’s both chambers base their arguments on solid economic analysis. The SNB is mandated to ensure the price and financial stability and is successfully fulfilling its goals. The commitment to stock 20% of the SNB’s assets in physical gold will squeeze the Bank’s capacity to fulfill its mandate and may reduce its credibility. Federal Council adds that two thirds of SNB benefits are distributed to cantons, one third to the Confederation, and warns that the nation’s income would also be harmed by the introduction of such constraint.

It is time to play it clever!

The tensions in Switzerland have been mounting over the past weeks due to unexpectedly balanced election polls on the Gold Referendum. However we believe that the rational will finally win over the Swiss gold debate. In our opinion, the markets have gone well beyond themselves. EURCHF edges the oversold conditions (RSI at 30%), the 1-month implied volatility advanced to 4.45%, highest levels over more than a year. The 1-month (25-delta) EURCHF risk reversals became quite negative as demand for put options increased overly. The rational calls for action. Given our biased view in favor of a “no” outcome, we believe that there is opportunity in the topside OTM calls. On the spot markets, EURCHF is seen at optimal entry levels for long EURCHF positions.

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