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Forex pairs in this Article » EUR/USD, USD/CHF
FXStreet (Bali) - The decision by Switzerland to vote for a measure to limit immigration will force the SNB to talk down the CHF in a few month for now, notes Sebastien Galy, FX Strategist at Societe Generale.

Key Quotes

"The passage was a surprise with the support coming mainly outside of the main cities in the German and especially Italian part of Switzerland. This vote impacts negatively local equities, the housing market and positively medium term inflation."

"The real story is for a few months down the road, when the SNB will need to talk down the CHF. Norway is a good guide. One can hope Europe will pay attention to the meaning of this vote."

"The swiss vote may be a wake up call in the Eurozone. The degree of internal price adjustment is excessively rapid in a currency that is very expensive from a very long term perspective, even if fairly valued cyclically. This is hardly the first time such a mechanism has been at work in economic history and one can hope the odds of ECB easing will increase."

"One core benefit of a high CHF was cross-border shopping in the Eurozone. Looking at the pattern of voting, one can forecast some significant slowdown at the Italian and German borders as has been the pattern in the past. Other consequences from the EU will take time to percolate."

"With a reduced access to foreign labour, Switzerland's potential growth is lower while its inflationary potential over the medium term increases from ultra low levels. Labour slack in Switzerland is very limited."

"With a higher inflationary potential over the medium term, the task of the SNB is more difficult. If it is forced to tighten earlier than the ECB, the EURCHF floor loses credibility. Lower potential growth also means that the deterioration in fiscal balances, long ignored by the market will be more evident (Kanton level). Looking a year or two down the road, the SNB is left in a sticky situation, tightening while maintaining an ultra expensive currency even as its net foreign position diminishes. The likely solution will be to talk down the currency. It worked for a few countries and is very much worth a shot as the market is generally happy to oblige."
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