Image © Albert Czyzewski, Adobe Images

- Multiple positive signals on weekly and daily GBP/CHF charts

- A rise to 1.2750 Oct lows strongly suggested

- CIBC's value model suggests GBP/CHF ‘cheap’

The Pound-to-Franc exchange rate is trading in the 1.12550s at the time of writing, virtually unchanged from the start of the week when it opened at 1.2559.

Contrary forces keep pushing the GBP/CHF up and down within the confines of a narrow range: Fears of a ‘no-deal’ Brexit continue to debilitate the currency whilst the options available to allow the UK evade a hard-landing provide downside protection.

Now the focus seems to be on whether Theresa May can negotiate enough concessions from the EU to win a vote on the deal in Parliament scheduled for mid-January.

The GBP/CHF is quite unique as a gauge of Brexit since it combines an at-risk currency, in the Pound, with a safe-haven currency, in the Franc, and this can exaggerate the effect of market sentiment on the exchange rate.

It makes the pair even more sensitive to shifts in Brexit mood. If, for example, the market gets pessimistic and foresees a chaotic hard Brexit, GBP/CHF is likely to weaken rapidly as not only will the Pound weaken but the Franc will strengthen at the same time, creating a sharper ripsaw effect.

If, on the other hand, an improvement in sentiment occurs, the pair is likely to rise just as rapidly because the Pound will strengthen from soft-Brexit hopes at the same time as the Franc weakens from falling safe-haven demand.

At the moment the technical picture suggests a high chance of more upside.

The weekly chart is showing a hammer candlestick formed in the week before which is a bullish signifier, especially if followed by a green up-week this week.

Another bullish sign on the weekly chart is the convergence between momentum and price. Price formed a lower low last week but momentum didn’t. The resulting non-confirmation is a sign bearish momentum is waning and a possible indicator of impending recovery.

The daily chart is also showing bullish signs. The pair has formed a bullish flag pattern during its recent recovery from off the December 10 lows. Bullish flag patterns are harbingers of rallies. This one strongly suggests the exchange rate will break to the upside, reaching a probable target at the 1.2750 October lows. A break above the 1.2615 level would provide bullish confirmation.

Another bullish sign on the chart is the shape of the RSI momentum indicator in the lower panel which looks much more likely to rise than fall, just by its overall look and feel. Rising momentum would only probably reflect a rise in the price of the underlying asset.

Pound Looks Cheap vs. Franc: CIBC

The pair is woefully undervalued, according to CIBC Capital Markets valuation model. The inference is that the pair will have a greater propensity to drift higher from its undervalued state. This biases the forecast to expecting a higher chance of more upside.

“Based on our near-term reversion indicators, the model still characterizes the long CAD/MXN and long GBP/CHF as Strong Mean-Reversion trades,” says Bipan Rai, North America head of FX for CIBC.

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