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The victory of moderate candidate Emmanuel Macron in the French presidential election has allowed the Swiss franc to depreciate significantly against the euro. This reduces the SNB’s need to intervene. While we still believe the CHF will generally remain under appreciation pressure, levels around 1.09 in EURCHF should be sustained for the time being. However, we expect falling exchange rates again by the end of the year at the latest. The Swiss franc has suffered substantial losses versus the euro since the presidential election in France (refer above chart).
The Swiss National Bank (SNB) should be overjoyed: At EURCHF levels well above 1.08, there is no longer any reason for it to intervene in the FX market to prevent a stronger franc. We, as renowned CHF bulls, also believe current EURCHF levels should actually be sustained. In the short term, there are two factors supporting higher EURCHF levels: (1) the ECB’s monetary policy and (2) brighter risk sentiment with regard to the stability of the eurozone. However, both factors are likely to turn again by the end of the year at the latest.
Options Strategic framework (Long CHF - call spread versus USD; hold vs EUR in spot):
The sell-off in USDCHF was too little, too late for our put spread that expired OTM. We continue to hold a short position in EURCHF as we do not believe that the French election will be a game-changer for EURCHF insofar as it will do little to resolve the powerful balance of payments disequilibrium in favor of CHF. That being said, we are close to our stop and would step aside for a period should this be triggered.
We await Monday's sight deposit data to gauge whether or not the SNB has continued to intervene even in the face of a stronger EUR. As an aside, we find it interesting that the SNB appeared to actively sell EUR FX reserves in 1Q in favor of USD and JPY, thereby undermining the objective of its intervention assuming this is to stabilize EURCHF (SNB probably sold EUR in 1Q17).
In all we are comfortable with the existing cash position in EURCHF, albeit the strikes on the USDCHF have proved frustratingly elusive as expiry looms next week.
Hold a 2m 1.0010 - 0.95 USDCHF debit put spread.
Stay short EURCHF in cash although you have seen sharp spikes that seem momentary, we are expecting the considerable pullback from bearish rallies. Marked at -1.23%.
