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The directional decoupling of CHF and JPY in recent weeks is as stark as it is unusual (refer above chart). In this write-up, we run you through on restructure a bullish CHFJPY option, stay long CHF in cash vs USD, added vs JPY and GBP intra-week.
As set out above, we ascribe this to:
1) an increasingly structural capital outflow from yield-chasing Japanese investors; and
2) the converse in Switzerland overlaid of course with the question mark that now surrounds future SNB intervention. As set out in a note (Scaling up CHF longs as US Treasury puts Switzerland back on its manipulation watch list), the SNB has little firepower left to intervene without falling fouling foul of the Treasury’s third quantitative criteria for manipulation, intervention in excess of 2% of GDP.
In Switzerland’s case this translates to CHF14bn, which coincidentally or not was the ceiling the SNB almost hit when intervening in the summer. This doesn't mean that the SNB can’t intervene on any given day or week, it does mean though that intervention will at most recycle only 20% of Switzerland’s current account surplus. The remaining 80% is free to exert upward pressure on CHF.
Could the SNB cut rates? Of course this is possible, but we believe this would require a more palpable sense of crisis (i.e. EURCHF sub-parity) for the SNB to impose such a politically unpopular measure (sparing residents the pain of negative rates defeats the objective since for CHF to weaken residents need to be incentivized to export capital).
Intra-week we bought CHFJPY and sold GBPCHF, both in cash. Today we are taking profits on a bullish CHFJPY seagull which was one of our 2020 Top Trades and reinvesting part proceeds in a levered form that more overtly positions for a sustained directional decoupling of CHF and JPY.
Implied correlation between USDCHF and USDJPY is of the order of 54% which strikes us as high given the breakdown in the relationship over the past week or two. To exploit this we recommend a 2m dual AED which pays out if at-expiry USDCHF is 0.5% or more below spot and USDJPY 0.5% or more above spot. The correlation saving is two-thirds compared to the cheapest of the individual digitals (10.5% compared to 33.7% for the USDJPY AED). This 10:1 levered options nicely complements the cash position in CHFJPY.
Trade tips:
Take profits on a bullish 3M CHFJPY seagull (11.50/114.50 call spread vs a 106 put). Paid 12.8bp on Nov 28th, closed at 1.84%.
Buy a 2-month dual at-expiry digital (USDCHF<0.9625 & USDJPY>110.70). Offered at 10.5% % vs. 34.1% for the cheapest individual digital (USDJPY leg). Spot refs 0.9680 and 110.10.
Short USDCHF from 0.983. Lower stop to 0.9800. Marked at 1.43%.
Long CHFJPY from 113.45 on Jan 14th. Marked at 0.43%.
Short GBPCHF from 1.2575 on Jan 14th. Marked at -0.37%. Courtesy: JPM
