This edition of EURCHF is to advocate short on Euro area politics:

This recommendation has been motivated by EUR facing multiple electoral hurdles on the one hand, and constraints to SNB FX interventions on the other. The latest key event in Euro area was the Italian referendum on December 4th. While the ‘no’ vote was expected, the margin by which it won was larger than expected.

For the euro, the main risk from Italy is the possibility of early snap elections and the events of this week have reinforced this view with the President’s comments indicating that a new general election can take place only after the mutually consistent electoral laws are put in place.

We think that a continuation of the current majority of PD and small centrist parties is the most likely outcome, with a mandate to form a new government as soon as on Monday (Italy after the referendum: steps towards a new government could come as early as next Monday).

The central idea for 2017 has been these lingering political events stimulates more volatility than the trend for the euro unless one can reasonably see an outright majority for populists next year. We are looking for modest concession in EUR (EURUSD down to 1.04 on higher US rates and politics) and recommend positioning for this via EURCHF instead.

On the other corner, the earlier than expected ECB taper was admittedly a hawkish surprise, but our bullish view on EUR were mostly concentrated in H2’17 on the view that this is when a harder taper would occur. With the ECB meeting now behind us and unlikely to be a driver of valuations in the near term, focus should turn to politics again.

The trade is also helped from the Swiss leg since SNB should eventually taper its FX purchases as well. The SNB response to EURCHF breaching 1.08 was not only belated, but also smaller than usual and the expectation is that the global political appetite for systematic and continuous FX intervention will be limited.

If you look at the technical chart that demonstrates the weekly trend of this pair, also states that the bears have been constantly been breaking major supports with bearish DMA crossover, current prices have gone below DMAs, while RSI signals strength in the downtrend.

Most noticeably, IV skews of 1m tenor still suggest hedgers’ interests in OTM puts which mean more downside risks are on the table. To substantiate this, negative risk reversal flashes are the bearish bets placed in OTC hedging arrangements.

Stay short EURCHF at spot reference of 1.0690, with the stop to 1.0751 and 1.0833. Marked at -0.35%.