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One victim of the easing ECB euphoria is the EURCHF exchange rate. While the euro was unable to appreciate against the dollar yesterday, it was at least able to maintain the previous day’s level. In contrast, EURCHF eased again. In our stance this is further confirmation of our discrimination:
If there is no fundamental revision of the EUR valuation (which is likely as explained above) the downward pressure on the EURCHF exchange rate remains in place. The SNB has to oppose this with sustainable interventions.
That’s something it does not want to do in the long term - that seems pretty clear. Admittedly we have been saying this for a long time without EURCHF actually easing significantly. And we agree: even if the status quo is not sustainable it may continue for some time yet.
But we continue to reiterating the same lacklustre trend to some sort of downside risk in EURCHF is anticipated. For two reasons:
(1) The data on the SNB’s sight deposits (an early indicator of intervention volumes) seems to suggest that the Swiss National Bank has to intervene with increasing intensity.
(2) We prefer to warn our readers one time too many than risk that they experience another 1/15 without warning (15th January 2015, the day the SNB abandoned the 1.20 floor in EURCHF).
OTC Outlook:
Please be informed that the implied volatilities of EURCHF ATM contracts of all expiries have been the least among G10 currency segment.
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 as it indicates puts have been relatively costlier.
To substantiate this view, underlying spot on weekly and monthly technical plotting, although the brief upswings but the trend has been pretty well in the range that has lasted almost for 1 year.
Here, the implied volatilities of ATM contracts are below 5% for next 1w tenors (3.8% to be precise) which is least among the G10 currency segment. Hence, we continue to see tepid swings in this pair.
