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Foreign Exchange

Citi warns on EURCHF stop losses; up to €10 billion under SFr1.20

Investors banking on stop-loss orders being filled anywhere close to their level if EURCHF trades down through the Swiss National Bank’s SFr1.20 floor should be prepared for disappointment.

The SNB has pledged to defend the floor with all means necessary, and has been successful in keeping EURCHF above SFr1.20 as the eurozone debt crisis has escalated since it imposed the level in September. However, the central bank could be overwhelmed if sentiment towards the euro deteriorates drastically – for example, if negotiations over private sector involvement in Greece’s rescue deal fall through.

Alternatively, some speculate that the SNB might be tempted to let EURCHF trade briefly below SFr1.20 to clear out positioning before it re-imposes itself on the market.

Citi says a break of SFr1.20 would be very messy and warns that investors with “cheap” stop losses placed on a SFr1.19 handle – whether it is SFr1.1990 or SFr1.1950 – should be prepared for possible slippage of 200 pips.

The bank estimates there are stop losses of between €7 billion and €10 billion under SFr1.20 across the market.

“It’s highly unlikely that much will get done on a SFr1.19 or a SFr1.18 handle should the SNB step aside or get filled in,” says CitiFX Wire.

Citi is not alone in highlighting the dangers that lurk below the SNB’s floor.

Morgan Stanley has warned that, should the level be breached, it would trigger a wave of selling as market makers in the options market are forced to delta hedge the puts and barriers they have written by selling EURCHF.

That, the bank says, would exacerbate the move lower in EURCHF and send it below the record low of SFr1.0094 it hit in September.

Nervy investors might be advised to abandon short positions in the franc now.



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