FxWirePro: Stay long in CHF versus EUR in cash and against USD via RKO

Sell EURCHF cash, avoid short cash position in USDCHF but maintain shorts via optionality structures preferably via put RKOs of 1m tenor. It is advised to stop out of shorts USDCHF at a small profit intra-week. However, upholding shorts to have a small delta appears to be a smart approach to keep a check on the downside potential in USDCHF through what is now a 3-week puts, RKO.

In addition, we are now adding an outright short position in EURCHF – this is partly a hedge to the USDCHF position, and partly a play on a slightly more extended period of de-risking in the FX market in which CHF-funded EUR bulls are at risk and in which Switzerland’s unrivalled current account surplus will come back into play.

It is striking to note that during one of the biggest bull markets ever in risky assets, the cumulative private sector capital outflow from Switzerland is close to zero over the past decade whereas the current account is close to CHF 650bn. If the current account cannot be recycled during a bull run, what hope during a correction, let alone a fully-fledged bear market?

Fundamentally, it seems quite not right with the conventional approach of the SNB lagging behind the ECB in normalizing monetary policy –indeed as far as balance sheet policy is concerned, the SNB is leading the ECB having presided over a modest reduction in excess liquidity since the peak last August. The SNB has directed policy to correcting the overvaluation of the franc; now this objective has been achieved (CHF REER is in line with its 30Y average), it is not unreasonable to suppose that policy can be normalized.

For good measure, Swiss CPI is already above its long-term average (0.8% vs a 20Y average of 0.5%). 

Sell EURCHF at 1.1506, stop at 1 .1736

Avoid short USDCHF should be stopped at 0.9375 for a profit of 0.39%.

Bought a 1m 0.92 USDCHF put, RKO 0.90, with the premium rebate if RKO is triggered for 15.5bp on February 2nd. Marked at 8bp.