One Day, CHF and EUR, Will Be €1

With the world beset by all manner of crises right now, the Swiss franc is most likely on the closest to a vertical trajectory as we’ll ever see in our time. (We hope.)
And during such times, there there’s often speculation that parity with the euro will occur.

But how likely is it?

Let’s look at indicative pricing in the options market for a clue.
Using spot and implied volatility, options market friends suggest odds that the euro falls to CHF1.0 before the end of the year are about 14%.
Odds over the next 12 months are almost 35%.
That means CHF is not the odds-on favorite for euro parity.
But that’s still rather too close for comfort.
For investors in Swiss-listed equities, all this can mean only more pain.
Year-to-date the SMI is off 7.3%, while Dow Jones Stoxx 600 is off less than 3% and DAX is up 4.4%.                 
Plus, SMI is inversely correlated with CHF’s strength against the euro. 
On a 60-day percentage change basis, inverse correlation is near -0.5.
Only five times over that period the inverse correlation has been -0.6 or beyond.
Further, by OECD calculations, CHF is the most over-valued currency in its universe at nearly 45% over-valued vs USD and 37.5% over-valued vs euro.
Today, Wednesday July 20th, we’ve had talk of a Swiss sovereign wealth fund, but that might obviously raise more problems than it solves.
The same goes for a temporary peg with the euro, also subject of recent talk.
Most likely, most of the above talk will remain just that, but in the meantime, keeping an eye on the correlations is wise, naturally.

After all, you can be sure this article was already old news for the big volume players who are sitting on EUR/CHF and feeding CHF/EUR.

Schwimmen Sie mit den Gezeiten.


This entry was posted in and tagged , , , , , , , , , , , , , , , , , . Bookmark the permalink.