In the weeks and months since the SNB established the floor in EUR/CHF at 1.20, the cross has slowly moved higher. Unlike the last time the SNB intervened to weaken the CHF, the market has proven quite reluctant to take them on and seems increasingly unlikely to do so, despite plenty of EZ jitters, ahead of the Dec 15 SNB meeting. The practical implication of this rock solid stability in EUR/CHF is that USD/CHF has moved to an almost perfect negative correlation with EUR/USD. We are long USD/CHF and believe both the current macro environment and the technicals favor our view. One notable consequence of the SNB’s success thus far with the EUR/CHF floor is that front end USD/CHF RR has moved dramatically to USD calls (see attached). Here’s a way to be long USD/CHF (and short EUR by proxy) via options that offers some attractive leverage with limited potential losses.
Spot ref 0.9160
Fwd ref 0.9156
Buy a 1m USD call, CHF put k=0.9400 at 18.3 vol in 1x notional and sell a 1m USD call, CHF put k=0.9700, RKI 1.0200 at 16.9 vol in 1x notional for a net cost of 79 USD bps (73 CHF pips)
Rationale: the 1m date now covers the Dec 15 SNB meeting. The strategy takes advantage of the big move in 1m USD/CHF RR’s to 2.6 vols USD calls over, which makes the low delta RKI you sell worth much more. For example, the vanilla 0.94/0.97 USD/CHF calls spread costs ~65bps. Best case scenario, USD/CHF rallies but 1.0200 does not trade in the next month (it hasn’t traded since Sep 10, 2010, see attached) make a max gain of ~10x premium paid. Scenario 2: USD/CHF rallies vigorously over the next month, 1.0200 trades and you are now long the 0.94/0.97 USD call spread and earn 3x premium. Max loss in any scenario is premium paid.
HSBC Global Research