Traders Happy to Position for Weaker Swiss Franc

Further ECB easing would increase the chance of SNB intervention

Option market offers evidence that investors are now increasingly looking for upside protection in euro against the swiss franc, Bloomberg strategist Vassilis Karamanis writes.

Friday’s price action led to speculation that the Swiss National Bank might respond to the European Central Bank’s probable stimulus expansion by intervening to weaken the franc.

While the franc’s move on Friday came amid month-end flows and holiday-thinned markets, 1-month smile analysis in euro-franc on Monday shows traders are willing to pay more for protection from a weaker franc compared to last Thursday.

Volatility smile: A common graphical shape that results from plotting the strike price and implied volatility of a group of options with the same expiration date. The volatility smile is so named because it looks like a person smiling. The implied volatility is derived from the Black-Scholes model, and the volatility adjusts according to the option’s maturity and the extent to which it is in-the-money (moneyness).

Furthermore, the euro-franc risk reversal curve has steepened on all tenors to show elevated upside expectations in spot price, with the notable exception of the one-week tenor that captures ECB’s meeting on December 3.

Volatility smile in dollar-franc paints a similar picture, while data from the Depository Trust & Clearing Corporation since Friday shows that option structures that benefit from a weaker franc largely outweigh those that gain from a stronger one.

Note: Vassilis Karamanis is a FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

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