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FxWirePro: Spot Swiss Franc’s bearishness perhaps, but not foolishness amid adamance between ECB and SNB - Smart directional hedging for EUR/CHF and USD/CHF risks

EURCHF depends on euro direction. The EURCHF finally managed to break above the 1.12 ceiling over the summer as it was carried aloft by the broad euro rally. Currently, flying on to multi-month highs, further advances will likewise depend on the euro’s general upward trend. There has been an enduring and meaningful positive correlation between the EURCHF spot rate and the nominal trade-weighted euro all of this year (refer above graph).

SNB needs to lag the ECB. The SNB is expected to hold monetary policy steady through 1H18, thus allowing the ECB to lead the way on policy normalization. Such a stance is necessary to keep the EURCHF exchange rate on an upward trajectory. Similar to the fitful climb in Swiss inflation, the EURCHF’s climb likely will be a sporadic one.

While the global picture on the volatility front hasn’t really changed in recent months. Implied and realized volatility is still hovering in their low or very low percentiles.

The general sentiments towards USD and equities have mainly been one of cautious skepticism for a few quarters already. They currently exhibit many characteristics of a tired asset but continue to hit new highs. In order to be a conscientious bear but not a fool, we have found a very cheap and safe way of gaining upside exposure with very limited burden in the event of a sudden downturn

The EURCHF exchange rate is primarily driven by developments in the euro area. As we fear that the ECB will disappoint the market and hold on to its expansionary monetary policy for even longer, we see EUR-CHF under slight downward pressure next year. The Swiss National Bank is unlikely to relax until EUR-CHF is back above the 1.20 level.

While the 25-delta risk of reversal of EURCHF has also not been indicating any dramatic shoot up nor any slumps but seems to be one of the pairs to be hedged for downside risks in the long run as it indicates puts have been relatively costlier.  ATM IVs have still been not that attractive to buzz call holders (refer above nutshell).

Hence, we still don’t foresee dramatic bullish risks but some upswings on cards that is puzzling this pair.

As a result, we recommend below option strategies using right options, thereby, one can benefit from certain returns.

Short 1m EURCHF OTM put (2% strike difference referring lower cap) and short OTM call simultaneously of the same expiry (2% strike referring upper cap) (we reiterate, the comparatively short term for maturity is desired).

On the other hand, we thus scale back EUR longs by unwinding long EURCHF outright and rotating it into long USDCHF via a risk-reversal (CHF shorts are still preferred tactically given expectations of an unchanged SNB policy).

The derivative strategists note that USDCHF risk-reversals are an attractive way to hedge pro-risk portfolios at current low vol levels.

While the FxWirePro currency strength index for the USD has been bearish by flashing a shy above 73, EUR at -80 (bearish), and CHF has also been bearish by flashing -98.

For more details on our index please visit below weblink:

http://www.fxwirepro.com/fxwire/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest

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July 13 14:30 UTC Released

USECRI Weekly Annualized

Actual

1.5 %

Forecast

Previous

2.2 %

July 13 14:30 UTC Released

USECRI Weekly Index

Actual

148.5 %

Forecast

Previous

147.4 %

January 31 00:00 UTC 238756238756m

ARAnnual Primary Balance*

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2016 bln ARS

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January 31 00:00 UTC 238756238756m

ARAnnual Primary Balance*

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Forecast

2016 bln ARS

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Bln AR bln ARS

January 22 19:00 UTC 250576250576m

ARTrade Balance

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Forecast

Previous

-1541 %

January 31 00:00 UTC 238756238756m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 22 19:00 UTC 250576250576m

ARTrade Balance

Actual

Forecast

Previous

-1541 %

January 31 00:00 UTC 238756238756m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 238756238756m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

January 31 00:00 UTC 238756238756m

ARAnnual Primary Balance*

Actual

Forecast

2016 bln ARS

Previous

Bln AR bln ARS

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