Buy the Swiss Franc as a Hedge to Brexit, says HSBC’s Bloom

Buying the Franc may be the best way to protect your sterling exposure ahead of the EU referendum.

HSBC’s global head of research has recommended going long the Swiss Franc as the ideal hedge in case of the sterling weakening following a Brexit vote.

According to his own analysis the pound is at risk of falling 15-20% in the event of the UK voting to leave the EU.

Those with an exposure to the pound, however, could hedge against this potential decline by buying Swiss Francs.

Bloom argues the Franc makes the perfect instrument for hedging against a depreciation in the pound, because of its “asymmetrical” nature.

By this he means that although it is likely to rally if the UK leaves the EU due to its safe-haven status, it is unlikely to fall markedly if the UK should vote to remain within the EU.

The alternative of selling sterling as a hedge has massive downside risk:

“Being long the CHF may be the best hedge against "Brexit". It might be tempting to sell GBP as a hedge, but the problem is that if "Brexit" were rejected, GBP would rally strongly, making the hedge a potentially expensive exposure.” 

The beauty of opting for the Franc is that is has little downside risk, with the main risk coming from its rapid appreciation attracting the attention of the Swiss National Bank, who might intervene to devalue the currency, however, Bloom sees this as unlikely to impact much:

“The SNB may intervene, but we believe it would only, at best, be able to slow the move rather than reverse it. However, were "Brexit" rejected, we would not expect maintenance of the status quo to provoke much CHF weakness.”

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