FxWirePro: Choice between USD/CHF FVAs or Straddles as SNB deputy’s remarks steer Swiss franc money market

The USD rebound appears to be stalling despite the upbeat US CPI and the rate expectations have remained largely unchanged. A rate hike in December is still only priced in at only two thirds to give US yields an additional boost. 

On the flip side, SNB bearish scenarios of CHF as the fact that SNB resumes FX intervention at higher spot rates than previous and deputy governing member states that LIBOR (London Interbank Offered Rate) benchmark now in serious jeopardy but moving away from it will not affect SNB's ability to carry out monetary policy.

Around 6 trillion Swiss francs ($6.20 trillion) worth of contracts use Libor as a benchmark, making it by far the most important interest rate for the Swiss economy.

But the measure is on the way out after banks were fined billions of dollars for trying to manipulate it. Turnover in the unsecured money market, the basis for Libor, also has decreased to record low levels for all currencies, Moser said.

The SNB conducts monetary policy by steering interest rates in the Swiss franc money market, telling the market in what range it intends to keep three-month Swiss franc Libor.

USDCHF 3M3M FVAs have lagged the upturn and are value buys along a mildly inverted curve. Holding USDCHF vol appeals because it can benefit from the full gamut of risk triggers that can afflict all USD-vols, is a useful hedge overlay on a bullish Euro macro portfolio, and retains exposure to idiosyncratic CHF weakness of the kind seen recently, all without the threat of overt SNB management that can frustrate outsized sell-offs in EURCHF.

The FVA format is motivated in part by the fact that USDCHF forward vols have severely lagged the surge in CHF-complex gamma, and partly by the mild inversion of the vol curve that ensures optically appealing flat slide/roll over time.

Admittedly some of the term structure shape is due to the forward starting 3M window covering the quiet holiday weeks of late December (3M3M = mid-November’17 to mid-February'18) that depresses 6M vol, but despite that, it may not be the worst idea to take delivery of and own USDCHF straddles through the first half of December that can reprise the above-average volatility of previous years around ECB and  Fed meetings when tapering and  rate hike decisions are expected to be announced.