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Swiss deflation increases pressure to raise EURCHF floor

A surprise fall in Swiss consumer price inflation on Monday raised more speculation that the Swiss National Bank was to raise the floor in EURCHF to bolster its economy.

Phillip Hildebrand, SNB

The figures put further pressure on the franc, which has suffered in recent days as the SNB has stepped up its rhetoric over the effects of what it has described as its massively overvalued currency. Speculation has mounted that the SNB, which imposed a 1.20 floor in EURCHF on September 6, might raise the boundary to CHF1.25 or even CHF1.30 as it battles to protect its exporters from a slowdown in global growth.

Philipp Hildebrand, SNB chairman, warned in the Swiss press over the weekend that the central bank was ready to take further measures to weaken the franc if the economic outlook and deflationary developments made it necessary.

“The franc is still highly valued versus the euro at the current exchange rate,” he says. “We expect it to weaken further over time.

“If that was not the case, it could lead to deflationary trends and weigh strongly on the economy. If the economic outlook and the deflationary development make it necessary, we are ready to take further measures.”

The comments followed similar remarks last week from SNB board member Jean-Pierre Danthine.

The Swiss franc, which was already sharply lower against the euro at the start of Monday’s session, lost further ground after data showed the Swiss consumer price index dropped 0.1% in October, taking the annual rate of CPI into negative territory for the first time since late 2009.

Jane Foley, senior currency strategist at Rabobank, said the amount of intervention conducted by the SNB to maintain the EURCHF floor in September was not exceptionally high, suggesting that the market had not heavily tested the central bank’s resolve.

“This should not surprise, since faced with a potential deflationary threat, the SNB may choose to print CHF to defend its position,” she says.

“Monday’s CPI data stresses this point and should heighten the risk that the SNB may decide to move its line in the sand from EURCHF 1.20 up towards 1.25 and potentially beyond. We continue to view dips in EURCHF as buying opportunities.”

The Swiss franc dropped to CHF1.2350 against the euro on Monday, down from CHF1.22 late on Friday.

Options market

EURCHF option vols were higher on Monday. One-month implied vol was trading at 10.85% from 9% on Friday, while risk reversals for the same maturity were 2.4 in favour of euro calls, up from 1.8 on Friday.

Traders said volume had been light on Monday, with market makers wary of the potential for the floor to be set at CHF1.30, which was only about 5% away from where current spot was trading, and being caught short gamma. Some traders suggested buying one-month 1.30 EURCHF 12-delta calls, which were pricing off 15% vols and cost about 28 basis points, indicating just how short-dated wings are becoming rich. Six-month CHF1.30 calls are being priced off 11% vols.

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