- Traders may hedge the so-called Brexit risk through the Swiss franc and currency-related ETF
- FXF has been a traditional safe-haven play in times of volatility
- FXF has gained 1.3% year-to-date as global volatility pressured riskier assets
Market observers are growing anxious as the United Kingdom contemplates breaking away from the European Union. However, traders may hedge the so-called Brexit risk through the Swiss franc and currency-related exchange traded fund.
The CurrencyShares Swiss Franc Trust (NYSEArca: FXF), which tracks the currency movement of the Swiss franc against the U.S. dollar, has been a traditional safe-haven play in times of volatility. FXF has gained 1.3% year-to-date as global volatility pressured riskier assets.
On the backdrop of greater uncertainty down the road, HSBC argues that the Swiss currency could strongly rally on the a Brexit but would not weaken if the U.K. decided to remain in the 28-country bloc, reports Katy Barnato for CNBC.
The U.K. is set to hold a referendum on June 23 where the electorate will vote on whether the country should remain with the European Union.
“The CHF would likely rally on Brexit, given the political and European-centric nature of the crisis ,” HSBC currency strategists, David Bloom, Daragh Maher and Mark McDonald, said in a report. “The Swiss National Bank may intervene, but we believe it would only, at best, be able to slow the move rather than reverse it.”
The HSBC strategists argue that while Brexit fears have been gaining momentum, there has been little evidence that the franc has priced in Brexit risks.
“This asymmetry makes the CHF the best choice as a hedge,” HSBC Strategists added.
Unlike the U.K., Switzerland has never been a part of the European Union. During times of duress among Eurozone members, the Swiss franc has acted as a safe-haven hedge. For instance, during the height of the Eurozone financial crisis, the franc currency rallied against the euro.
The U.S. dollar weakened against the franc currency Wednesday, trading around CHF0.9765 Wednesday.
The Swiss franc appreciated against the USD Wednesday after the Federal Reserve held interest rates steady while lowering expectation for the number of hikes this year to two from a planned four rate hike.
CurrencyShares Swiss Franc Trust