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EUR/CHF hit a 2 year low today as investors fear that a yes vote on the Swiss gold referendum at the end of the month will force the Swiss National Bank to choose between adhering to the vote or defending the EUR/CHF 1.20 peg. The vote asks whether the SNB should raise the share of gold in its asset to 20% from 8%. The reason why this could affect the currency is because if the referendum passes, it would require the central bank to sell its foreign reserves, much of them in euros to buy gold. This is a dangerous predicament because it would restrict the SNB’s ability to defend its currency. The vote will be a close one that gold bugs and EUR/CHF traders will watch carefully. However while it poses a serious risk to EUR/CHF, the vote is more than 2 weeks away and the SNB could still verbally and possibly even physically intervene in the currency to keep it from breaking the 1.20 peg before that time.
In a pair like EUR/CHF that is distorted by central bank intervention, technicals are not very reliable. However as shown in the daily chart, 1.20 is an obvious support level for the currency pair. In the last 2 years, the “low” for EUR/CHF was 1.1996, a level that we believe will hold before November 30th. While there appears to be resistance at 1.21, verbal and/or physical intervention could drive EUR/CHF up 100 to 300 pips in a matter of days depending the strength of the central bank’s actions.