When Investors Mention Euro Systemic Risk, Traders Turn to Franc

  • Biggest gain versus euro last week since mid-December
  • Systemic-risk surge positive for Swiss currency: Lombard Odier

The Swiss franc rose against all of its 16 major peers as volatility increased in Europe’s corporate bond market and costs rose for protecting against default among banks and insurers.

The franc’s surge against the euro added to a gain last week that was the biggest since mid-December. Before the rally that began three days ago, the franc had depreciated 2.4 percent against the single currency, even as stock markets globally tumbled.

“When systemic risks rise, Swiss franc is a winner,” said Salman Ahmed, chief strategist in London at Swiss money manager Lombard Odier Investment, which oversees about $150 billion. “The franc is highly correlated with European credit market -- especially financials. Over the last few days systemic risks have risen,” he said.

Switzerland’s currency strengthened 0.7 percent to 1.09688 to the euro as of 3:09 p.m. in London.

The cost of insuring Deutsche Bank AG bonds against default increased to the highest since 2011 after analysts at CreditSights Inc. said Germany’s biggest bank may struggle to pay coupons on its riskiest bonds next year should operating results disappoint or the cost of litigation be higher than expected. 

Deutsche Bank

Deutsche Bank defended itself over concern about credit risk. The lender is “absolutely rock-solid,” Co-Chief Executive Officer John Cryan wrote in a letter to employees on Tuesday. His confidence is largely reflected in money markets, where stable lending rates between banks indicate that this isn’t yet a repeat of the region’s 2007 financial crisis.

The weakness in European corporate bonds is seen helping restore some of the currency’s recently lost glory as a haven asset. It fell 1.8 percent against the euro last month, the most since August, and in February reached its weakest level since Switzerland abandoned its exchange-rate cap in January 2015.

Options traders are also reassessing the franc. They’re paying a 0.39 percentage point premium for contracts that protect against an appreciation in the currency against the euro versus a decline, three-month 25-delta risk reversals show. That compares with as little as 0.19 percentage point, on Feb. 5, the least since since November 2014.

The franc carved out a niche as a haven currency during the euro-region’s debt crisis when investors viewed it as a refuge from turmoil on continental markets.

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