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Foreign Exchange

FX research roundup: EUR/CHF in focus, apocalypse not-yet for GBP

EUR/CHF has been quiet of late. The SNB still appears to be protecting 1.46 but the question is for how much longer. There are a few strategists now advocating a short position in the pair.

Alan Ruskin at RBS recommended a short EUR/CHF position back in December. He is sticking with his “well entrenched” trade citing the stronger Swiss economy and continuing bearish sentiment for EUR.


Elsa Lignos at RBC did not expect any tightening at Thursday’s SNB meeting and over the next one to three months expects, “the threat of SNB intervention to remain. Nevertheless each fresh bout of intervention has diminishing effect.” And while she points out that technically a real break of 1.4586 brings into focus the October 2008 low of 1.4322, Lignos expects any move later in the year: “The impossible trinity of monetary policy means the SNB will have to allow EUR/CHF to float freely before raising rates (short of taking the very unlikely step of introducing capital controls). To satisfy the need for tighter policy over the medium-term, we expect the SNB to allow progressively more EUR/CHF depreciation throughout the course of 2010 and target 1.40 by year end.”


Paul Meggyesi at JPMorgan kept his options open on the rate decision, pointing out that “the SNB only meets quarterly” but, of course, that makes it even easier to advocate a short EUR/CHF position: “Against the backdrop of economic recovery and a strong external surplus, we expect fundamental pressure for CHF appreciation to continue, and for the SNB’s opposition to such pressure to wane. The risk/reward from [the] policy meeting is highly asymmetrical in favour of holding CHF.”


Neither BNP Paribas nor Brown Brothers Harriman advocate a long CHF position yet. Brown Brothers, in its weekly FX view merely says: “SNB mtg – rates on hold. Strong CHF not welcome at the SNB.” BNP has argued that intervention performed the function of QE for the Swiss, given the small size of the Swiss bond market. However, “the need for the SNB to intervene to add liquidity is diminishing.” And “while the intervention policy was softened at the December meeting, it may still be too early to remove intervention policy altogether, especially given that the problems in Europe are set to keep the euro under significant pressure.” It was to be all eyes on the meeting’s statement: “most important will be if the SNB maintains the sentence: ‘The SNB will act decisively to prevent any excessive appreciation of the Swiss franc against the euro’. Once this sentence goes EUR/CHF will break massively lower.”


But the sentence remained. It will be an interesting three months for EUR/CHF, especially if the EUR continues to weaken.


As an aside it is not often that you find two views as diametrically opposed as Brown Brothers’ view of “SNB to be amongst the last CBs to start hiking.” and BNP’s of “expect the SNB to be the first of the major central banks to hike rates.” Game on.


We read no research going against the sterling bear-trend this week yet GBP held up remarkably well; especially given the stream of relentlessly awful UK data. Nick Beecroft at Saxo called the early data (and Fitch and Moody’s warnings) “a mini perfect storm”, and after Wednesday’s truly dreadful, if weather-related, industrial production figures, one might have expected further carnage.


Admittedly, EUR/GBP did get close to last Monday’s highs but this time progress was more laboured. Some commentators are pointing to cable risk reversals as a further indication of the market’s bearishness – one- and three-month 25-deltas favour GBP puts against USD by 2.0% and 2.4% respectively and against EUR by 1.2% and 1.4% – but there are questions on the commitment of the position takers and how totemic the 1.50 level is perceived. Market-makers are often structurally long of short-end cable volatility and may not be too short of gamma on a net basis. But trading of positive gamma by the put buyers might be providing cable with some support.

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