• SNB Vice President Danthine’s comments highlight the risk of a policy exit from the 1.20 EUR/CHF floor in H1 2015.
• The window for EUR/CHF gains into the 1.25 – 1.30 range is now, extending through H1 2014, and needs a flight to quality reversal that will show up in negative ‘other investment liabilities’ in the balance of payments data.
• Thereafter, the current pricing of risk reversal favoring EUR/CHF puts over calls for tenors 2yrs and out, looks entirely appropriate in lieu of exceptional Swiss fundamentals and prospective SNB policy.
In the clearest official signal of conditions that could lead to an end to the EUR/CHF 1.20 floor, SNB’s Vice President Jean-Pierre Danthine was quoted as saying, “The day the SNB decides to raise rates, there can no longer be a restricting minimum exchange rate”.
In many ways Danthine simply acknowledged the inherent contradiction that the SNB could face if they tried to raise rates but also were committed to providing unlimited liquidity to defend the EUR/CHF floor.
Read the full report: FX Daily
Deutsche Bank