Bets still on for Swiss franc cap breach despite likely 'No' vote on gold

Currency speculators are still betting that a three-year old Swiss franc currency cap will be breached, despite polls showing that a vote to require the Swiss National Bank to load up on gold will fail. That is because even if the November 30 gold initiative is voted down, the risk that the European Central Bank could resort to asset purchases and drive the euro lower is still giving speculators courage to put on bets favouring a stronger franc.
The referendum, if passed, would force the SNB to hold 20 percent of its reserves in gold, making it harder defend the cap by impeding its flexibility to conduct policy. Partly as a result, the franc has risen to a 26-month high against the euro of 1.2009 per euro, bringing it close the SNB's of 1.20 francs per euro, imposed to protect Switzerland from having to live with an overvalued currency.
The latest rise has triggering talk the central bank may have to intervene to weaken the currency or even negative rates to make the currency less attractive. Some speculators are targeting the cap to be breached by buying options that bet the euro will fall to 1.1995 francs, in case of a "Yes" vote, data from the Depository Trust and Clearing Corporation show. That has been the consensus trade, so far, and has driven up the near-term cost of hedging against sharp moves in the euro/Swiss franc pair to its highest in a year.
And while a "No" vote - as firmly predicted by polls - will see the franc weaken against the euro, some say it will only be temporary as the SNB will be under pressure to respond to further loosening by the ECB. "We are looking for a quick move in euro/Swiss franc to 1.2050/75 if the gold referendum vote fails," said Peter Rosenstreich, chief FX analyst at Swissquote Bank, Geneva.
"But then you have a significant issue of the ECB. If the ECB does quantitative easing, then the floor comes under threat. So its like jumping from the frying pan into the fire." With just over a week to go until the vote, investors are putting bets in the options market that the euro could strengthen to 1.2075/80 francs. It was at 1.2012 on Thursday. "For markets, the clearest implication is that the risk-reward for remaining long euro/short Swiss franc remains intact," said Oliver Harvey, macro strategist at Deutsche Bank.