How Long Until EURCHF Is Re-Pegged To 1.10?

Tyler Durden's picture

Swiss National Bank currency reserves just topped CHF300bn in May for the first time on record. As SocGen notes this jump from a mere CHF66bn in April is the second largest rise since August last year - right before the SNB put in place the 1.20 cap in EURCHF. The increase in reserves is not a major surprise after EURUSD plummeted over eight big figures last month and the SNB was left with no choice but to step up its EUR purchases in order to defend the cap. However, the size of the increase may cause fresh political consternation as the cost of unlimited foreign currency purchases continues to climb and a definitive resolution of the euro crisis is still remote. What worries us more is the market's 'hedging' of a tail-risk event in Europe has driven risk-reversals in EURCHF (a way of understanding the bullish/bearish bias in FX options prices) that implies a 1.10 level for EURCHF which is somewhat incredibly supported by an analysis of the variation in ECB and SNB balance sheet changes. As the threat of capital controls looms large and Swiss 2Y rates press back towards -30bps, we wonder how long until a new 'equilibrium' cap is adjusted down to 1.10.

The relative change in the size of ECB and SNB balance sheet reserves (black below) appears to be leveling off around an implied 1.10 EURCHF level...

 

which is also implied by the EURCHF FX Option market (risk-reversals - black line)...

 

and given the historical dependence between EURCHF and Swiss 2Y rates (black line below), it would appear that even the rates market is screaming for a 1.10 peg...

One wonders how Goldman's inveterate BRIC-bull Jim O'Neill is feeling about his Top FX trade of 2012 of repegging the rate to 1.25 - or perhaps it is yet more of the same Muppet-Mauling - as he is selling EURCHF to all those, very few, left out there who do what Goldman says and not what it does...

 

Charts: Bloomberg