The CHF/JPY seagull is agoing to be a soft play on European reflation that can also work in a modest risk-off climate due to Switzerland's superior BoP position. This has also managed to benefit from outsized JPY selling from Brexit-and trade-related developments this week, while CHF has been comparatively resilient.
We add a long CHF vs USD to capitalize on the higher bar from the Fed to hike underscoring CHF’s natural inclination to perform in low-yielding environments, again capturing the effects of Switzerland’s difficulties recycling its large current account surplus. It should also benefit from any signs of a cyclical turn in Europe.
We continue to see recovery potential in EUR-CHF due to declining recession fears. In the long term, however, downward pressure from the ECB's continued ultra- expansionary monetary policy is likely to increase again.
Trade tips:
Long a bullish 3M CHFJPY seagull (long a 111.50/114.50 call spread vs short a 106 put). Cost 12.8bp CHF, (spot 109.27). Marked at 47bps.
Sell USDCHF in cash at 0.983. Stop at 1.003.
Stay long volatility via USDCHF FVA
USDCHF 3M3M fwd vols are at multi year lows, hence FVAs are attractive for owning event risk on the Democratic candidate selection process. As described above, there’s some conflicting signals in the polls, which may prompt something of a surprise outcome in the early- February bellwether states. The FVA provides a vehicle to capture any outcomes that catches the market off- guard.
Buy 3Mx3M USDCHF FVA @5.55/5.85 indicative. Spot ref 0.9966. Marked at 5.63 vol pts. Courtesy: JPM
