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- GBP/CHF rate extends PM May's victory bounce.

- As SNB flags CHF impact of political uncertainty.

- Downtrend intact, but caution is order of the day.

The GBP/CHF rate has built on gains made after Theresa May's leadership win this Thursday, aided by a negative diagnosis on the Franc from the Swiss National Bank (SNB), but this upward move may not be sustained.

Switzerland's central bank flagged “fragile” exchange rate conditions as cause for concern Thursday, given political dysfunction in the UK over Brexit and Italy due to its budget, as well as falling growth and inflation at home as well as across the border in the Eurozone.

As a result the Bank kept its interest rate at a historic low of -0.75%, the lowest in the developed world. A negative rate is effectively a tax on money deposited at the SNB by commercial lenders, and is designed to stoke inflation.

A byproduct of that is a weaker Franc, which is important because the Swiss currency is a 'safe-haven’ that rises during times of crisis, although such increases can suppress the inflation the central bank is attempting to lift.

Above: GBP/CHF rate shown at daily intervals.

The SNB has had to intervene in the currency market on myriad occasions since the 2008/09 financial crisis in order to weaken the Franc, which has risen due to demand for safe-havens. Switzerland has a heavily export-dependent economy that is vulnerable to becoming less competitive when the Franc rises, which further undermines inflation.

The uncertain global backdrop and decline in European growth, which slowed to only 0.2% in Q3 from 0.4% previously, is likely to keep pressure on the SNB to continue stimulating the economy while fighting its own currency using negative interest rates and active intervention.

“It looks more an more as if the SNB is going Japanese,” says Charlotte de Montpellier, an economist at ING Group. “We do not expect a rate hike until March 2020 and it could be postponed even later.”

The SNB forecasts Swiss growth to slip to only 1.5% in 2019 from 2.5% in 2018. It revised its inflation forecast down to 0.5% for 2019, from 0.8% in September, and says inflation will come in at 0.9% for 2018.

From a technical perspective the SNB's negative stance gave increased impetus to the GBP/CHF bounce from earlier lows around 1.2380 that was already underway before the announcement. GBP/CHF has now risen above 1.2550.

Yet despite the rebound there is insufficient technical evidence to suggest the beginning of a new uptrend, nor do we know if the downtrend will resume either.

Above: GBP/CHF rate shown at weekly intervals.

From a fundamental perspective, the outlook is opaque. If anything the Pound is probably more likely to rise than not since the chances of a 'no-deal’ Brexit are considered even lower after Prime Minister May's survived a leadership challenge, and it would require such a Brexit to further substantially devalued the Pound.

It could be the case that the new uptrend is simply too young and just needs a bit more time to take root before it can become clear. As such, we remain cautious about automatically assuming the downtrend will resume, and would be looking for a clear break below the 1.2380 lows first to confirm more downside, to a target of 1.2220.

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