Thomas J. Jordan, SNB chairman is due to speak later today at the Universite libre de Bruxelles at 17:00 GMT. Traders will try and pick up on clues regarding future monetary moves by the Swiss.
Following last month’s stunning decision to remove the EUR/CHF 1.20 floor and decrease the interest rate on deposits from -0.25 to -0.75, currency traders were left in shock and are now very sensitive as to what may come next.
Since the SNB event, correlation between EUR/CHF and USD/CHF has shifted from a negative 40% to a highly positive 93%. The correlation chart below shows this transition from -40% to +93%.
Later this week, we have the Greek situation which will shed some light on the future of the EU. This creates uncertainly and may increase volatility. There is a high chance EUR will decline faster than USD.
Given the positive correlation between EUR/CHF and USD/CHF, an interesting position to take is a long EUR/CHF Put and a long USD/CHF Call. If the EUR falls, the Put option will pay-out more than the loss from the Call. On the other hand, if we are wrong and EUR rises the loss from the Put option will be covered by the payout from the Call i.e. we have hedged our losses.
The position:
Long EUR/CHF Put, expiry on Feb 20th, strike at-the-money (strike rate = current spot rate)
Scenarios:
- If EUR/CHF reaches 1.0500, payout at expiry would be 763 CHF and your maximum loss from the USD/CHF Call is 401 CHF - you make a net profit of 362 CHF
- If USD/CHF reaches its resistance level of 0.9400, payout at expiry would be 625 CHF and your maximum loss from the EUR/CHF Put is 478 CHF - you make a net profit of 147 CHF
- Any move beyond the mentioned levels will result in a greater profit; if the spot price, of either pair, moves 0.5% past the level then profit will be 100%.
This strategy can be described as a straddle across two currency pairs! It exploits the positive correlation between EUR/CHF and USD/CHF, plus the expectation that the market will be volatile this week. If our expectation is correct a net gain will be made from the positions. If incorrect and the pairs continue trading around their current level then a loss will be made. This loss is limited to the premium paid.
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