Greek exit threatens SNB cap

Investors are increasing bets the Swiss National Bank will be unable to defend the franc’s cap against the euro as the common currency comes under pressure on the prospect of Greece leaving the euro zone.

The action is in the options market, where the one-month premium in favour of Swiss franc calls – bets the franc will rise against the euro – has risen to its highest since August 2011, a month before the SNB introduced a cap of 1.20 francs on the currency pair.

The SNB imposed the cap in September 2011 after the safe-haven franc hit record highs last year and raised concerns about deflation and a sharp slowdown in the Swiss economy. Despite a brief breach of the cap in early April, the SNB has said it will defend it with all its might.

But with the euro falling sharply against other major currencies since Greek voters punished parties supporting the country’s international bailout in a May 6 election, it has become tougher for the SNB to defend the peg.

This, and the fact it has already been breached once, has emboldened some investors and speculators to challenge the central bank, particularly with Greece facing a second election on June 17, analysts said.

“Some hedge funds are betting that as the euro zone situation deteriorates, the SNB’s peg will be breached,” said Geoff Kendrick, currency strategist at Nomura, who expects the SNB to defend the peg at all costs.

Reflecting those bets, one-month implied volatility, a gauge of option prices and expectations of future price swings, has risen to around 5.75 percent from around 3.4 percent at the end of last week, according to Reuters data.

Risk-reversals, a measure of the relative demand for options on the euro rising or falling against the franc, are showing a st rong bias for more euro weakness and edging back to levels seen just before the SNB introduced the floor.

The one-month euro/Swiss franc 25-delta risk reversals are showing a premium of around 3.4 vols in favour of a weaker euro. It was all but flat, suggesting investors thought the cap would hold, as recently as early May.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell