Swaps Bet Wins as SNB Holds 1.2 Franc Policy Floor, Credit Suisse Says
Investors should use swaps to wager volatility in the euro against the Swiss franc will decline as Switzerland’s central bank maintains its exchange-rate floor, according to Credit Suisse Group AG.
The franc has depreciated 9.8 percent against the euro since the central bank imposed a limit on the franc’s value to no stronger than 1.2 franc per euro on Sept. 6. The Swiss National Bank acted to weaken the currency after the European debt crisis and concern the world economy was heading for a recession had pushed it to a level the central bank described as “massively overvalued.”
Credit Suisse currency strategists advised selling three- month volatility swaps on the euro-franc in a strategy that will profit if swings in the currency decline, according to a research note published today from Zurich-based Credit Suisse, Switzerland’s second-biggest bank after UBS AG. The seller profits if the volatility on the exchange rate during the life of the contract is less than the pre-established implied volatility on the swap of 10.25 percent.
“We expect the euro-Swiss franc floor at 1.2 to remain unchanged well into 2012 and possibly longer,” wrote the Credit Suisse team led by Peter Von Maydell. “We believe the SNB needs to see a deeper, more prolonged fall in growth and clearer trend of deflation to justify further efforts toward franc devaluation. We expected delivered volatility on the cross to remain low,” the team added.
Switzerland’s currency appreciated to 1.22879 per euro at 12:52 p.m. in New York, from 1.23193 on Nov. 25. The exchange rate strengthened a record of 1.0618 on Aug. 8 and closed on Sept. 5 at 1.10971.
The SNB (SNBN) lowered borrowing costs to zero and imposed the limit on the franc versus the euro after the currency’s gain to a record threatened to erode economic growth. Vice Chairman Thomas Jordan said in an interview with Le Matin Dimanche published yesterday the central bank remains “ready to take further measures if the economic outlook and the risk of deflation require it.”
The Organization for Economic Cooperation and Development said it expects Swiss consumer prices to remain unchanged in 2012 after rising 0.4 percent this year, according to the Paris- based group’s economic outlook report published today. In May, it had forecast consumer prices to increase 1.1 percent in 2012.
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