Swiss Franc Volatility Stirs as SNB Vote Raises Cap Risks

Updated on

A referendum the Swiss National Bank says will impede its ability to conduct monetary policy is contributing to bets on greater price swings in the franc on concern its currency cap may be at risk.

Two-month implied volatility on the euro-franc exchange rate is the highest since 2012 relative to a one-month gauge. That reflects a growing price premium for options linked to the currency for the period including the vote on the SNB’s assets. The referendum, which the SNB says would make it hard to fulfill its mandate, is due on Nov. 30.

If passed, the proposal would require the central bank to hold at least 20 percent of its assets in gold, among other measures. The SNB held foreign-exchange reserves of 462.2 billion francs ($488 billion) at the end of September with total assets of about 522 billion francs. The risk is that it would become more difficult for the central bank to defend its cap by amassing more foreign exchange. The SNB may also need to use its currency reserves to buy gold.

“Should this go through it’s going to have profound effects on the SNB’s ability to hold the floor,” said Peter Rosenstreich, the chief foreign-exchange analyst at Swissquote Bank SA in Gland, Switzerland. “Looking out at the volatility curve you’re starting to see people are pricing it in. Not tomorrow, but two or three months down the line, people are expecting something to happen.”

The franc has strengthened 1.8 percent against the euro this year as the European Central Bank lowered interest rates to records and started an unprecedented program of private asset purchases. That’s moving it closer to the 1.20 francs per euro cap imposed by the SNB to limit the currency’s appreciation. It was at 1.20594 francs per euro at 5:08 p.m. London time today.

Implied volatility on two-month options for euro-franc slipped to 3.53 percent today. While that’s above its 2.81 percent average for the year, it’s down from a record-high of 28.07 percent in August 2011. The one-month implied volatility declined to 2.54 percent.

The premium for two-month options to buy the euro against the franc versus those allowing for sales dropped to 0.24 percentage points today, the least since Sept. 30, 25-delta risk reversals show.

The SNB set its currency limit in September 2011 after investors anxious about the euro-area debt crisis pushed the franc nearly to parity with the single currency. It hasn’t intervened to defend it since September 2012.

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