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FX COLUMN-Franc may be a sell if Switzerland goes for gold

-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --

By Neal Kimberley

LONDON, Nov 3 (Reuters ) - Foreign exchange traders who want to bet on the outside chance that this month's Swiss referendum on gold will pass might be best served selling the franc rather than holding it into the decision.

The initiative, opposed by the Swiss National Bank (SNB), is aimed at preventing the central bank from selling its gold holdings. It would also require the SNB to bring back gold held overseas and hold at least 20 percent of its assets in gold.

Conventional wisdom seems to suggest that if the initiative were passed it might threaten the SNB's three-year-old cap on the value of the Swiss franc versus the euro at 1.2000 francs.

The Swiss central bank has indeed said that if the initiative passed, it would restrict the SNB's ability to set monetary policy.

But the SNB has been absolutely consistent in trumpeting its commitment to the ceiling for franc strength versus the euro.

SNB board member Fritz Zurbruegg said on Oct. 21 that the SNB stood ready to purchase unlimited amounts of foreign currency to defend the 1.20 cap and could take further measures immediately if needed.

Even negative interest rates were not ruled out.

That does not sound like a central bank which is about to abandon the cornerstone of its monetary policy, especially since the gold proposals would take years to become effective.

In truth, traders have come to realise in recent years that you bet against the SNB at your peril.

The SNB has repeatedly shown too that its capacity to push back against pressure from the forex market can easily outstretch the time horizon of most speculators.


If Switzerland's voters back the gold initiatives, the SNB would be forced to react if traders sought to pressure the 1.2000 cap by selling the euro against the franc.

That of course would entail the SNB buying euros and selling Swiss francs to ensure the exchange rate remains above 1.2000.

The question then would be who gives in first, the SNB or the foreign exchange market?

Arguably the SNB has far more to lose in such a standoff than the collective speculative forex market.

And it is much easier for a central bank to intervene to stop its currency appreciating than it is to stop it falling.

A central bank can print as much local currency as is needed, selling that out for overseas currencies and building foreign reserves, as has been the case for the SNB.

But, as the Bank of England discovered in 1992, efforts to stop the local currency falling are only as effective as the size of the foreign reserves available to be sold down in exchange for the falling local currency.

A gambler might think therefore the odds would be stacked in the SNB's favour, particularly as it can achieve its objective by other means than just soaking up euros against the franc.

The euro's value against the franc is the product of the euro/dollar exchange rate multiplied by the dollar/Swiss rate.

The SNB could buy euros versus the dollar to influence the euro-side of the equation.

But that would probably not play well with the European Central Bank which would not welcome a disinflation-encouraging appreciation of the euro versus the dollar.

The SNB could, however, influence the franc side of the euro/Swiss equation by buying dollars versus francs instead.

That would have the added effect of bearing down on disinflationary pressures in Switzerland currently being caused by falling prices of dollar-denominated energy imports.

As the chance of the SNB immediately abandoning its commitment to the franc's cap versus the euro, even if the gold referendum passes, is close to, if not actually, zero, the logic of buying francs, on a view the initiative passes, seems flawed.

The SNB will not just roll over and with that in mind, perhaps the better bet for traders thinking Switzerland's voters may OK the gold referendum proposals, is, counter-intuitively, to sell the Swiss franc versus the euro and/or the dollar.

(Editing by Andrew Heavens)