While the main focus over recent months has been on political events within the US, the Eurozone, and the UK, there is an upcoming political event in Switzerland which could have a big impact on the markets.
On Sunday, the Swiss public will take to the polls on Sunday to vote on whether Swiss law should take priority over international laws and treaties. The initiative was launched by the Swiss People’s Party (SVP) which is both the country’s biggest party and also a firm ultra-conservative and Eurosceptic party.
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The upcoming vote is the result of a referendum on immigration that took place nearly five years ago when the Swiss majority voted against mass immigration and asked for immigration quotas to be introduced.
The introduction of these quotas, however, contravened international law between the EU and Switzerland and so never became introduced, despite the requirements of the Swiss constitution. The SVP essentially wants to make sure that international law is never again put before Swiss law.
Tricky Time For Swiss/EU Negotiations
However, the vote presents a great difficulty because it comes amidst negotiations between Switzerland and the EU regarding the future relationship between the two economies. The EU wants to secure a “framework agreement” which will replace the current 120 treaties in place. This would essentially compel Swiss legislation to align with EU rules on specific issues.
If Switzerland votes in favor of the SVP’s initiative this weekend, this would make“the framework agreement” incredibly difficult to achieve given that the Swiss public would effectively have voted against it.
The issue of a framework agreement is an important one for the EU as it doesn’t want it to be an example for Brexiteers given the critical nature of the Brexit negotiations. Indeed, the EU has now stated that it is linking the health of the negotiations with recognition of Swiss law that facilitates cross-border trade.
Cross-Border Trading Under Threat
Essentially, the EU is saying that if by December 2018, no sufficient progress has been made in negotiations, European access to the Swiss stock exchange and Swiss-listed securities will be under review.
Unless the EU grants Switzerland equivalence, Switzerland would likely respond with a similar action if this indeed came to pass which, of course, would have significant repercussions for global markets.
Negotiations between the EU and Switzerland have become quite congested recently and this upcoming vote could make things even more difficult to resolve.
If the Swiss public votes “yes” in Sunday’s referendum, this would be a huge blow to the prospect of a successful end to negotiations and would likely fuel a wave of risk aversion around Swiss asset markets in the near term and potentially EU-wide asset markets.
Current polls suggest that the Swiss public will vote against the initiative though polls over recent years have been famously bad at forecasting the outcome when such populist and emotive agendas are in play.
While the Swiss Franc is traditionally used as a safe-haven asset, in these circumstances we would likely see CHF under heavy pressure due to capital outflow as investors ditch Swiss assets.
For now, EURCHF continues to move lower as CHF retains a safe haven flow around ongoing EU political risks (Brexit, Italian budget) and broader risks from the US / China trade war. However, if we see a “yes” vote on Sunday we could see this quickly change.
The main support zone in EURCHF is the 1.1230 – 1.1254 region which price is not far off testing. To the topside, we will need to see a break of the bearish trend line from summer highs as well as the structural level of 1.1496 to encourage a bullish bias.