Swiss Franc Falls Ahead of Gold Vote

By Chiara Albanese 

The Swiss franc is edging ever closer toward the limits of the Swiss National Bank's tolerance in the run-up to a vote that could force the central bank to buy large amounts of gold, leaving market-watchers on alert for an intervention to push the currency back down.

The central bank is committed to preventing the euro from trading under 1.20 against the franc to deflect deflationary pressures stemming from an unduly strong franc, a policy it maintains by buying euros whenever the neighboring common currency sinks too close to that limit.

On Friday, the euro sank to 1.2014 against the franc, a fresh two-year nadir. Dragging it down is a vote set for Nov. 30 that could force the central bank to hold 20% of its assets in gold, from around 8% now. Such a move would restrict its ability to defend the franc from undue strength because it would have less flexibility to buy euros. The central bank has repeatedly expressed opposition to the motion.

"The 2012 precedent suggests that the SNB might intervene and purchase euros at around 1.2010," said Beat Siegenthaler, a currency strategist at UBS in Zurich.

Citigroup said in a note to clients that a large order to buy euros at 1.2010 is now resting in the market. That means that if the exchange rate sinks that far, the automatic buy order will kick in. The bank added that there was an even larger buy order visible to the market Monday, at 1.20 precisely. A person familiar with the matter said Monday's buy order was for roughly EUR10 billion. The party behind the buy orders wasn't disclosed.

"November 30 could be an instrumental date with respect to the effectiveness of FX intervention by the SNB," said Rabobank strategist Jane Foley, adding that the euro is likely to continue trading very close to the SNB's limit ahead of the vote.

In a recent survey of 63 investors, Société Générale found that an increasing number of its clients expect further easing from the Swiss National Bank to fight the upward pressure on the franc.

While only a minority expect the Gold referendum to pass, two-thirds of respondents said the vote is likely to lead to increased political tensions which should favor an SNB move into negative interest rates in the first half of 2015.

The referendum idea stems from a proposal of certain members of the Swiss People's Party, who say the initiative would give more credibility to the Swiss franc and to the central bank's monetary policy.

Write to Chiara Albanese at [e-mail]