Stay long CHF vs USD (3-month put spread) and EUR (cash). Keep short a 3-mo strangle in EURCHF against the underlying cash short. It’s important to stress we are bullish CHF for domestic, reasons (current account = 10% of GDP, private-sector capital outflow = zero).

We are thus comfortable short EURCHF even though we think the risk of a Le Pen presidency is only half the one-third chance priced by betting markets.

Nevertheless, political fear provides an opportunity to earn risk premium, hence we have sold the elevated level of EURCHF vols through a 3m strangle against underlying cash short. While low volatility tends to self-destroy over time as it leads to complacency and then leverage, which makes the system more vulnerable to even minor shocks. Partly due to post-crisis caution, credit growth at the global level has been a lot more stable in this cycle and has not accelerated.

The risk premium for low strikes has eased quite a bit this week (3m risk reversal has tightened from -4.0% to -3.25%) but even so the market over-discounts the risk of Le Pen and undervalues the SNB backstop (we expect the SNB to continue to lockdown EURCHF through unlimited intervention in the event of a Le Pen victory just as it has done over the past four weeks when it has spent 2.5% of GDP to keep EURCHF above 1.06).

USDCHF could become more vulnerable nearer April 14th when the US Treasury is due to release its bi-annual currency manipulation report. Will Treasury call a spade a spade?

Stay short a 3m strangle in EURCHF (sell a 1.0850 call and a 1.03 put).

Stay short EURCHF in cash (first entered 1.0720).

Hold a 3-month 1.0180-0.9750 USDCHF put spread.