The recent announcements of the two big international markets, the Swiss and the Norwegian Krone may provide a few predictors of the current debate on how to address the post-Brexit trade troubles in the UK. If the Swiss authorities attempt to recover Krone at the same time the British Pound trades through, then a Bank of England intervention should have little effect on the currency.
The Swiss have stated their intention to recover the Krone that is due to move to their Swiss Franc basket. The promise to get the Franc trade down is a very visible indicator that is still yet to be tested by the Swiss authorities. The Norwegian Krone basket is coming into the market in the end of January.
Both the Swiss and the Norwegian Krone trade around twice the speed of the Euro when it is around parity with the Pound Sterling. Since the currency is expected to fall much more quickly, that will definitely slow the European export to the UK economy.
A possible mechanism, which has not yet been demonstrated to affect the currency, is if the British Pound gets a boost after the French Presidential elections in January. Most of the guesswork at this point will be reliant on how well the Bank of England is performing. If it is doing well in the first quarter, then it will provide a much better platform to sell sterling.
The British Pound in its unstable condition will probably spike to the level which it trades through the Swiss Krone. The high demand for sterling will certainly be profitable for the pound, which when trading through the Norwegian Krone, may drive it even higher, perhaps towards parity with the Euro.
The Norwegian Krone basket is expected to be up about 25% above the level of the Swiss Franc basket by the end of the month. That is a clear sign that the EU oil export plan will deliver significant windfall for the Euro, with the largest oil exporter, Norway, coming close behind. The Krone basket will also reflect the coming performance of the Swiss Franc.
The Swiss and the Norwegian Krone have many years to recover. That makes these statements more predictable and much better candidates for a g-o-a strategy, rather than a large scale oil export plan.
The reason the currency markets behave in such a deterministic manner is that people have a certain confidence in those currencies, the Swiss and the Norwegian Krone, that they can deliver the desired outcome on the targeted dates. It is a well known, but robust, business strategy.
A large number of people within the financial community have already taken a bullish view on the Swiss Krone. It may be that their money is going to be the larger win, should they be proven right. Those who have a better understanding of the game are more likely to take the opposite position.
The main question for the UK and the Euro, is how the leadership teams of both, the Swiss and the Norwegian Krone, determine the timing of the withdrawal from their monetary planning scheme. The political rhetoric might lead the leaders to have a decision over two weeks ahead of the EU summit. This would mean the UK would be sent the Krone without any assurances of a payment, and then without any notice.
The danger is that as the Krone is processed through, the timing could be an issue. The Swiss Government has not explicitly threatened a ban. That would be the “alternative” approach and the results would be very unlikely to be positive.