The positive flow position for CHF is enhanced by an ongoing re-appraisal of the SNB’s interest rate policy.

“Negative interest rates can work in a small economy” is what the chairman of a Swiss national bank said yesterday. And the IMF also seemed quite fond of the Swiss National Bank’s negative interest rates recently and even recommended lowering them further.

Only where exactly in Switzerland are the negative interest rates working so well? As far as I am aware the negative interest rates are intended to discourage capital inflows and thus prevent an appreciation of the Swiss franc.

Just as a reminder: the franc came under particular appreciation pressure after the SNB had lowered its interest rates into negative territory. Only a few weeks later it was forced to abandon the minimum exchange rate.

Since then, admittedly, the franc indeed has not appreciated further. However, that is due less to the negative interest rates and more due to the SNB’s interventions. And that these are still required is being illustrated by the unhampered rise in FX reserves.

Driving forces of bearish scenario:

1) The SNB lowers the deposit rate to -1.0% and/or lowers the exemption threshold;

2) A further increase in intervention;

3) Eventual Fed tightening encourages heavier capital outflows and CHF carry trades.

Buy 6M 35D USD calls/CHF puts (delta-hedged), for EURCHF, the forecast shows continued tight range-trading between 1.09-1.10 over the 6 months to the 1y horizon. Hence, we think no other strategy is suitable than a strangle in jerking IVs.