FxWirePro: Factors that drive EUR/CHF further bearish risks – OTC updates and options strategy

The EURCHF exchange rate has already eased back below the 1.13 mark and has therefore returned into areas that are likely to begin causing the Swiss National Bank (SNB) discomfort. SNB is scheduled for its monetary policy meeting next week.

Technically, the pair has tumbled below 1.1376 (i.e. 21-EMAs) and for now, on the verge of retracing 50% Fibonacci levels with intensified bearish momentum. 

The Swiss central bank had seemed much more relaxed as regards the exchange rate when it climbed from levels around 1.10 to above 1.14 last year. Even though inflation in Switzerland is positive again, core inflation has remained at only 0.5% since the start of the year, which is anything but comfortable. 

Driving forces of EURCHF:

1) Protracted EM stress and deleveraging of FX-funding. 

2) Systemic Euro area stress on aggressive Italian fiscal easing. 

3) The ECB delays rate hikes into 2020. 

OTC updates and trade recommendations: (Short in EURCHF at 1.1392, spot reference: 1.1295 levels) 

EURCHF risk reversal numbers and positively skewed of implied volatilities of 1-3m tenors signify the bearish risks to prevail further. 

25-delta risk reversals indicate the difference in volatility, and therefore price, between puts and calls on the most liquid out-of-the-money (OTM) options quoted on the OTC market. Negative bids indicate puts are more expensive than calls (downside protection is relatively more expensive). 

Accordingly, we advocate 2m (1%) in the money -0.79 delta put options, the rationale for choosing such derivative instrument is that the in the money put with a strong delta would move in tandem with the underlying downward moves.

Currency Strength Index: FxWirePro's hourly EUR spot index has shown 102 (which is bullish), while hourly CHF spot index was at 76 (bullish), while articulating at 09:32 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex