EURCHF - trading the downside prospects

Forex

John Hardy

Head of FX Strategy

EURCHF is on the move, having now traded to a new low since early 2017 on an interesting possible driver - the US Treasury earlier this week having placed Switzerland back on its list of potential currency manipulators. The implication here is that to avoid negative further attention from US policymakers, the Swiss National Bank (SNB) will have to exercise restraint in intervening against further CHF strength as it has done regularly since the traumatic revaluation of the CHF after abandoning the CHF ceiling exactly five years ago today in 2015. Removing the assumption of a powerful central bank leaning against the currency's strength could mean a significant repricing of the franc higher, particularly given that over the last couple of years, Switzerland's economy has managed quite well and has rebuilt its current account surplus back toward a more historically normal 10% of GDP by late last year versus as low as sub-7% in early 2018. A current account surplus operates to constantly appreciate a currency unless capital flows compensate by leaving the country. 

Trading a stronger CHF via EURCHF
Traders looking to trade CHF from the long side now potentially have an altered playing field if the SNB steps back here and the market psychology changes around that new fact.  Traders looking for a re-rating of CHF higher might consider EURCHF short trades as a preferred vehicle as EURCHF is the dominant benchmark for the CHF exchange rate. As the chart below shows, we have just broken to the lowest levels since early 2017 as the US Treasury this week placed Switzerland on the currency manipulator watchlist. Shorting here with a stop north of 1.0850 and a target below 1.0500 or even close to parity for a stretch target is one strategy, as any move back above 1.0850 would suggest that for now, this move lower has been a false break.

A second way to trade EURCHF downside over the medium term - especially for a more considerable move and in a way that allows a trader to maintain a position regardless of short term volatility - is via a EURCHF put option, for example, a 3-month (April 15) 1.0500 put option, which costs 29 pips (spot reference 1.0760). A higher break-even price can be achieved with a higher strike price but at a higher premium cost (1.0600 for same expiry costs about 45 pips - so breakeven near 1.0555 vs. 1.0471 for the 1.0500 put option at 29 pips.)

Chart: EURCHF weekly

Source: Saxo Group

Risk warning
One potential offsetting factor for CHF bulls is the idea that the SNB has become something of a sovereign wealth fund in its own right as 20% of its enormous reserves (overall reserves worth well north of 100% of Swiss GDP and having rocketed some 800% from pre-financial crisis levels and the SNB's investments saw enormous positive gains in 2019). This fact could act as a further driver for CHF strength in the event late CHF strength since December of last year has also been driven by the virtual melt-up in equity markets. But it can also mean sudden downside risk if the mood for risk appetite changes drastically - i.e., CHF weakening sharply and EURCHF rising quickly. 

Only advanced traders with a thorough knowledge of the risks of trading options should consider an options trade in the FX market - the chief factor to consider in this case that any long EURCHF put option trade as outlined above can result in a 100% loss of the amount risk on buying the option.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.