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FxWirePro: Old Wine In The New Bottle, If Hedging Sterling Awful, Swiss franc Instrumental

Before we run you through the core part of this write-up, let’s just quickly glance at the bearish and bullish scenarios of Swiss franc:

Bearish CHF Scenarios:

1) No Brexit (revocation of Article 50 and/or a second referendum, 

2) The resolution to US/China trade conflict and a 10-15% bounce in equities, 

3) The renewed SNB intervention. 

Bullish CHF Scenarios:

1) A deeper downturn in European growth and cancellation of ECB hikes, 

2) The extended US government shutdown, US growth falls towards 1%, risk of Fed easing, 

3) The escalation in the US/China trade conflict, 

4) The no deal Brexit

Well, we have upgraded the risk bias around the forecasts from CHF negative to neutral. We addressed the issue of how the currency likely to perform amid bearish/bullish scenarios in this post and amid potential recessions in the previous posts. One has to be well equipped with the contingency hedging alternatives in the potential geopolitical and the recessionary risks. 

Activate CHF longs to hedge against "Brexit" risks: Swiss franc is foreseen to be spiking further decisively on "Brexit", however, unlikely to weaken if at all the UK prefers for no-deal Brexit.

Mediation may nosedive in the face of substantial inflows and constrained policy options.

Upholding longs in CHF could be the wise hedge against "Brexit" as it might be luring to short sterling as a hedge, nevertheless, the apprehension is that if "Brexit" is rejected, GBP would show strong and considerable rallies, likely to cause the hedge a potentially expensive exposure. 

Under such circumstance, the CHF would likely rally on "Brexit" given the political and Euro-centric nature of the crisis. 

The fundamental driver: the CHF NEER is a reliable recession hedge insofar as it delivers the best volatility-adjusted performance into and during recessions of the major safe-haven currencies including USD, JPY, and SGD. The SNB may intervene, but we believe it would only, at best, be able to slow the move rather than reverse it.

However, if at all "Brexit" rejected, we would not expect maintenance of the status quo to provoke much CHF weakness. Noticeably, Swiss franc doesn’t seem to be priced in much "Brexit" risk which means there is little risk premium to disappear. 

This lop-sidedness is likely to cause the CHF as the best hedging alternative. It will capitalize on "Brexit" but not suffer regardless of Britain’s deal or no-deal options.

Furthermore, among the funding currencies, CHF is the only one near fair value, with USD the richest, followed by EUR and JPY. Yet, None of these valuations are at an extreme indicating that movement in either direction is possible.

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -127 level (which is highly bearish), while hourly CHF spot index was at 71 (bullish) while articulating (at 13:02 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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