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The Swiss National Bank (SNB) has maintained status quo in its monetary policy today to leave everything unchanged (kept libor rate at -0.75%). Consequently, the development of CHF over the past weeks did not seem to have provided any reason to tighten the monetary policy reins after all. With lingering uncertainty over the Italian budget conflict and Brexit, CHF seems to be much more in demand again recently. During such a circumstance that the SNB does not want to give the FX market any other arguments for trading the franc at stronger levels, which would put pressure on the inflation outlook and domestic exports.
The franc may have rather underwhelmed since we published those forecasts – the TWI has shed around 1.5%, so giving back one-third of the gains it made from mid-May to mid-September - but we are not inclined to reconsider the forecast this month as we attribute this correction to largely temporary factors (a ceasefire for EM, evidence of some smoothing intervention from the SNB, albeit very low-key if at all, and receding risks of a disruptive Brexit).
The forecast thus continues to envisage modest appreciation in the franc, a move in EURCHF to 1.12 over the coming one-two quarters, albeit we have downgraded the risk bias from bullish to bearish as we are more conscious of the potential for the yawning rate differential between USD and CHF to generate at least intermittent interest from short-term traders to sell CHF (as may have occurred over the past month).
The surprising context to the franc’s slippage over the past month is that it has occurred despite the ratcheting up of tensions in Italy. In the prior six months, EURCHF was more than -90% correlated to Italian credit risk. Over the past month, however, the correlation to the BTP spread has flipped to +70%. Courtesy: JPM
The execution of option trading strategy:Contemplating above rationale, the recommendation would be on buying OTM -0.49 delta put while simultaneously shorting ATM put with similar expiries and buy OTM 0.5 delta call while simultaneously shorting an ATM call with similar expiries. This strategy is structured for a larger probability of earning a smaller but certain profit as USDCHF is perceived to have a low volatility.
Alternatively, stay short GBPCHF from 1.3051. Marked at 2.29%. Lower stop to 1.30.
Buy 6M GBPCHF - GBPUSD vol spread, equal-vega notional. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly EUR spot index has shown 100 (which is bullish), GBP is at 84 (bullish), while hourly CHF spot index was at -1 (neutral), while articulating at 12:13 GMT. For more details on the index, please refer below weblink:
