CHF: Yesterday EUR-CHF closed at its lowest level since January of 2013, closing at levels around 1.2116. EUR-CHF volatilities increased notably alongside the spot move; 1 month ATM volatilities have now increased by 0.7% vols since early August. This is saying something, because the level at the beginning of August was a mere 1.3% in vol terms! What are we to make of all this? Risk aversion is clearly not the culprit, at least judging by the behaviour of other asset classes over the course of the day.
-Indeed, it's instructive to look at EUR-CHF risk reversals which currently trade at a mere 0.05% in vol terms, albeit still illustrating a miniscule bid to EUR calls. If risk aversion was the dominant theme, clearly riskies would instead show a bid toward EUR puts. The explanation is to be found in the behaviour of other crosses, especially the likes of GBP-CHF and USD-CHF. Year to date many investors used CHF as a funding currency and invested in the G10 growth stories such as GBP and USD.
-Now that markets are starting to reappraise the fundamental arguments in favour of higher yielder appreciation, the likes of GBP-CHF have lost ground, putting pressure upon CHF crosses in general. The bottom line is that the move in EUR-CHF is explained by position adjustment in other CHF crosses. It is in no way connected to market expectations of an imminent change in SNB policy with respect to the lower bound at 1.20.
Quotes from Credit Agricole CIB:
-CHF will remain a sell on rallies this week - particularly against high yielders such as the NZD. This is due to additional room provided by improving risk sentiment to sell CHF. Moreover we see little scope for the SNB to become less dovish over the next quarter. From these angles this week's focus will be on the release of inflation and retail sales data.
-Regardless of improved growth prospects, the overvalued franc is keeping monetary conditions tight. This in turn suggests that there is little risk of inflation surprising considerably higher.
-From that angle the CHF is likely to remain driven by global risk sentiment, which we expect to improve further given brightening global growth prospects. All of the above suggests that the market environment will stay in favour of carry trading strategies. Hence we maintain our view that peripheral crosses such as NZD/CHF should be bought and target 0.7880 next week.
Quotes from UniCredit Research:
-CHF: The firmer USD is likely to further steady USD-CHF back above 0.89 after last week's dip. EUR-CHF will probably remain close to 1.2150 again.
Quotes from UniCredit Research:
-EUR-CHF has been trading a little weaker this past week and we would consider a break of levels just above 1.21 as rather critical with respect to possible SNB intervention, due to an acceleration of the downward momentum. However, we cannot imagine markets taking a risk like this and are, thus, rather convinced that they will refrain from a test of this threshold.
-The upside is limited as well, as long as the CHF retains its status as a safe-haven currency,against the background of ongoing geopolitical tensions. Levels above 1.22 are currently not very likely for the next few days. Similarly hard to achieve would be a sustained break of 0.90 in USD-CHF.
