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Stay long CHF vs USD (3-month put spread) and EUR (cash). Take profits on a short 3m EURCHF strangle One of this week’s more telling market developments was the sell-off in EURCHF despite the benign outturn to the Dutch election.
The price action may strike some as counter-intuitive given the conventional wisdom that the franc is little more than an overvalued safe-haven to the political risk in the region. Our perspective is rather different and while we don’t disagree that the franc has benefitted from safe-haven inflows, such activity is not the primary source of demand for the currency.
Net private inflows to CHF are far more fundamental and stem from the enduring disequilibrium between the current account surplus (10% of GDP) and net private sector capital outflows (effectively zero last year). The main impediment, meanwhile, to capital flowing from Switzerland to the Euro area is not perceived political risk (albeit this doubtless plays a role), but rather the lack of a pull factor in the form of material, risk-adjusted interest rate differentials.
Recent price action is consistent with our narrative that underlying upward pressure on CHF is due to strong domestic fundamentals rather than EUR stress. It also vindicates our recommendations to be long CHF against both EUR and USD as we believe CHF can outperform even as the market gets to a positon of greater comfort with the French election.
We keep the cash trades but take profits on a 3m EURCHF strangle that we sold to monetise what we regarded as an excess political risk premium in the cross (the market underpriced the near-certainty of massive SNB intervention in the event of a Le Pen victory that would limit the resultant downdraft in EURCHF). Since we sold, 3m vols have dropped by 1.7 points and the 3-mo risk reversal has tightened from -3.4% to-2.5%.
Stay short EURCHF in cash (first entered 1.0720 November 11th). Marked at -0.14%.
Unwind short 3m strangle in EURCHF (1.0850 call vs 1.03 put). Received 1.113%, closed at 0.78%.
Hold a 0.9750-0.95 USDCHF put spread, expiry May 4.Paid 65.7bp, marked at 26.6bp.
