FxWirePro: An outlook of euro crosses in 2019 and RV trades

Despite a strong Christmas recovery in US equity markets, the broader market has largely ignored the move, with US yields and the USD remaining under pressure. Elsewhere in Europe, we get the final readings for December manufacturing PMIs from Germany, France and the Eurozone. These are expected to be largely unchanged from previous readings.

EURCHF exchange rates are lingering at around 1.17/18, as we observed in late 2017 / early 2018 were little unreasonable. Euro zone risks remain intact, as a result, the Swiss franc benefits from its status as a EUR substitute without the idiosyncratic risks of the single currency area. 

The lower end in EURCHF nonetheless remains limited by the SNB as it will want to prevent a return to levels close to parity if it does not want to allow all its monetary and exchange rate measures of the past four years to be in vain. That means 2019 is unlikely to bring a repetition of 2018 for the franc. 

EURCHF is a realistic proxy for a tactical short in EURUSD given that the two has been 85% correlated over the past three years. Whereas we suspect this relationship is at risk of breaking down should EURUSD ever rally aggressively, we suspect EURCHF will continue to closely track EURUSD whenever the euro is under pressure. This all comes down to Switzerland’s superlative external position and the possibility that the SNB has reached or is closer to the limits of its ability to intervene to frustrate a fundamentally justified appreciation in CHF. Simply put, the SNB has recycled virtually all of Switzerland’s current account surplus for a decade (contrast this with the BoJ which has done none), yet the SNB’s ability maintain this policy in a shakier asset market environment is questionable with the balance sheet at 122% of GDP and provisions sufficient to cover only a 17% asset write-down (i.e. the SNB is effectively 5.3x levered). The SNB has notably omitted to intervene since the spring despite the Italian crisis and it can be no surprise therefore that the CHF NEER is 6% higher than the trough in May. 

We argued in the 2019 outlook, that the big dollar turn was not yet imminent. Nevertheless, the base case for 2019 does envisage a handover from US to Euro area growth and mean-reversion in undervalued European FX. SEK screens as the cheapest European currency (REER 14% below 20Y average) and also has a central bank that is poised to slowly reverse its multi-year experiment with super easy monetary policy. 

We consequently added a medium-term put spread in USDSEK, but structured it as a 1-1.5x to lower the cost as we lacked conviction that the trade was yet poised to work. We weren’t wrong in that judgement; it obviously remains to be seen whether EUR and SEK can turn things around against the dollar by the middle of 2019.

Trade tips: 

Short EURCHF at 1.1348 with a stop at 1.1409 for target upto 1.1180 level.


Long a 6M 8.55 - 8.15 USDSEK ratio put spread in 1x1.5 notional. Paid 76bp in November. Marked at 46bp. Courtesy: Commerzbank