EURCHF - Free lunch soon, or will the SNB give it up?
The Euro started to suffer on all crosses, so not surprizingly it is faling a bit against CHF too. Why is this chart important? It is important becasue of the 1,20 FLOOR, which was introduced by Swiss National Bank in September 2011, not much after the pair collapsed due to several factors down to 1,00 (parity). Since the rates were virtually already zero in Switzerland, and they have no big debt mkt (bond mkt) where they could do QE, SNB had no other choice than to floor down the pair. This means that any time it goes to 1,20, they buy an unlimited amount of EUR against CHF to avoid any further appretiation of their domestic ccy, as they see a too strong CHF would be really harmful to the Swiss economy.
By the time they put the floor in place, EUR was stuck at the level for a very long time. SNB did a continous intervention. What was the interesting game there? Due to the sharp moves before, implied volaility was really high. Some tried to "fight" the central bank, selling EURCHF, but the smart thing was actually to stay on their side rather. It is very difficult to break a Central Bank on the strong side attack of the ccy, from which they can print theoretically an unlimited amount. So the trade was simple, selling PUT options for 1-2-3 Months maturity, and get paid a nice Premium. Yes, it was a free lunch, I really enjoyed it myself too. It was a good free cash for more than 9 months!
Later the cross moved higher, so the 1,20 strike has become too much OTM, and also implied volaitility decreased a lot. The free lunch game was over.
But let's look at it now. As the EUR is getting more and more doomed, the pair is slowly moving lower, approaching the 1,20 barrier again. Here we have a few important questions: will it go even lower from here, will the implied volatility pick up enough, but most importantly will some HFs try to attack the barrier again and if they do so, how committed the SNB will be to protect it further?
The case is it could be really nice to sell those 1,20 Puts again for some free cash. But what happens if they release the floor? Certanly the pair would quickly collapse to 1,00 again, and believe me you'd have no chance to hedge the short delta exposure at all!
SNB so far looks committed to protect the floor (they emphasize it in all their statement), and I think it can stay so, especially that ECB is likely to be more dovish for long time. But the devil never sleeps. So let me think about what could be the best strategy, and when I get to the conclusion, I will let you know.
On the other side if you have any ideas to share, it is more than welcome, pls feel free to comment.
By the time they put the floor in place, EUR was stuck at the level for a very long time. SNB did a continous intervention. What was the interesting game there? Due to the sharp moves before, implied volaility was really high. Some tried to "fight" the central bank, selling EURCHF, but the smart thing was actually to stay on their side rather. It is very difficult to break a Central Bank on the strong side attack of the ccy, from which they can print theoretically an unlimited amount. So the trade was simple, selling PUT options for 1-2-3 Months maturity, and get paid a nice Premium. Yes, it was a free lunch, I really enjoyed it myself too. It was a good free cash for more than 9 months!
Later the cross moved higher, so the 1,20 strike has become too much OTM, and also implied volaitility decreased a lot. The free lunch game was over.
But let's look at it now. As the EUR is getting more and more doomed, the pair is slowly moving lower, approaching the 1,20 barrier again. Here we have a few important questions: will it go even lower from here, will the implied volatility pick up enough, but most importantly will some HFs try to attack the barrier again and if they do so, how committed the SNB will be to protect it further?
The case is it could be really nice to sell those 1,20 Puts again for some free cash. But what happens if they release the floor? Certanly the pair would quickly collapse to 1,00 again, and believe me you'd have no chance to hedge the short delta exposure at all!
SNB so far looks committed to protect the floor (they emphasize it in all their statement), and I think it can stay so, especially that ECB is likely to be more dovish for long time. But the devil never sleeps. So let me think about what could be the best strategy, and when I get to the conclusion, I will let you know.
On the other side if you have any ideas to share, it is more than welcome, pls feel free to comment.
