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Will the Swiss Franc Be Shaken by Populist Referendum?

A referendum in Switzerland on Sunday will ask whether Swiss law should take precedence over international laws, particularly those coming from the EU. A vote by the people to take back legislative control would undoubtedly weaken the Swiss franc.

Posted Nov 24, 2018

The Swiss love a referendum; they’ve held seven national votes already this year, with three more scheduled for Sunday.

Of Sunday’s three votes, the one with the most market-shaking clout is that which asks Swiss citizens whether Swiss law should prevail over international treaties—the so-called “self-determination” initiative. Like Brexit, the question is driven by populist sentiment and in this case is supported by the right-wing Swiss People’s Party, “arguably Switzerland’s most powerful political force,” per the BBC’s Imogen Foulkes.

Although not the betting favourite, a vote by the Swiss to regain control of legislation could lead to a “Swexit” of sorts. Although Switzerland is not currently a member of the European Union, it shares a deep economic relationship with the bloc—a relationship formed by a series of bilateral treaties, which may need to be torn up. A poll published last week had 40 percent of voters saying “yes.”

Implications for the FX markets are clear: “yes” means the franc decreases in value. Simply put, investors despise political uncertainty and the economic uncertainty that accompanies it.

“If Sunday’s proposal is passed . . . Swiss-EU relations could get awkward again,” says Foulkes.

By way of Brexit, those in the UK have learned all too well what awkward dealings with the EU get you: a significantly weaker currency.

Markets closed on Friday quoting a rate of 1.13 francs per euro, representing franc appreciation of 6.1 percent since April 20th, when it bounced off the symbolic 1.2 francs per euro level (the euro achieved 1.199 francs).

The franc’s solid performance against the euro throughout much of this year has been driven by Brexit-related concerns on the euro side, and by the alleviation of global trade tensions which threaten small, open economies like Switzerland.

Against a strong US dollar, over the past half-year the franc has weakened marginally, by 0.6 percent, but it has firmed by 4.1 percent against the Australian dollar and by 2.8 percent against the yen.

Considered in isolation, ignoring for a moment any broad economic ramifications, referendum-induced currency weakness wouldn’t be bad news for Switzerland’s central bank, which continues to describe the franc as being “highly valued” and which remains “willing to intervene” in markets to forcibly weaken it.


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