Forex options show little faith in SNB euro floor

NEW YORK, June 14 Thu Jun 14, 2012 4:49pm EDT

NEW YORK, June 14 (Reuters) - Switzerland's central bank says it is determined to prevent the country's currency climbing too high against the euro, but there are doubts in the options market its resolve will hold during the latest chapter of the euro zone debt crisis. Risk reversals show investors are building up bets in the options market for a break of the floor of 1.20 francs per euro the Swiss National Bank set last year to shield the economy from the flood of safe-haven flows due to Europe's crisis.

The SNB has intervened regularly to hold down the value of its currency. The bank's Chairman Thomas Jordan told a news conference on Thursday it was ready to buy foreign currency in "unlimited quantities" and "take further measures at any time."

However, the euro has tested the SNB floor 12 times in intra-day trading since early April -- 11 times over the past month -- suggesting increasing doubts about the limit amid a desire for traditional safe-havens such as the franc.

Investors face a cliffhanger Greek election on Sunday that could produce fresh market turmoil and pile pressure on the SNB's foreign exchange floor.

Given signs the SNB may find it too costly to hold that floor, investors may be wise to buy into the franc on chances it could strengthen against the euro.

"For the first time since September, private investors are fighting the SNB rather than going in the same direction," said Steven Englander, head of G10 strategy at CitiFX, a division of Citigroup in New York.

"Portfolio managers from September until early May thought the risk was that the SNB would push up the floor, but now they are afraid that the floor may break to the downside."

The SNB's target, announced early September 2011, proved successful at first, with the currency pair staying above that level for seven months.

Three-month euro/Swiss franc risk reversals show demand for euro puts leaping, trading at around 5 percent from about 1 percent in early May, days before inconclusive elections in Greece spurred widespread risk aversion.

The recent rise in risk reversals indicates volatility in put options exceeds volatility in similar call options, with more people betting on a currency's decline.

Six-month risk reversals also show a firm bias for euro puts, jumping to around 6 percent versus early May's 2 percent.

New Greek elections on Sunday have markets on tenterhooks. If the anti-austerity party wins it could set the stage for Greece to leave the euro zone.

"Even if Greece gives confirmation it is staying in the euro zone at the next election on June 17 the problems with the euro do not end there," said Matthew Schilling, a commodities broker at RJO Futures in Chicago.

"Don't be surprised if the Swiss franc catches fire as a safe haven even with the 1.20 cap set by the SNB," he said.

Indeed, the prospects for the euro remain bleak. Many countries in the region are either in or on the edge of recession and the European Central Bank is expected to lower rates or add stimulus in coming months, all negatives for the currency.

"Today's SNB comment confirms they will do everything in their power to avoid the currency pair from falling below the floor," said Charles St-Arnaud, currency strategist at Nomura Securities in New York.

"But, investors still want to hold Swiss francs, even if they cannot expect gains," he said. "In relative terms, it is better to have a zero return than a negative return."

"The market continues to challenge the SNB," said Chris Tevere, senior currency strategist at Forex.com in New York. "The weakening euro has made it a lot more expensive for the SNB to keep the EUR/CHF 1.20 floor intact."

The options market has been pricing in higher volatility for the currency pair.

Implied volatility, a measure of option market expectations of price movements, on three-month euro/Swiss franc options has climbed to about 4 percent versus 2.4 percent in early May.

"Market uncertainty about the near term outlook for euro/Swiss franc lingers despite repeated assurances by the SNB that they will defend the 1.2000 currency floor with utmost determination," CitiFX said in a report on Wednesday.

"Selling pressure on euro/Swiss franc could intensify even further from here if the Greek elections over the weekend fuel more fears about the integrity of the euro zone," the bank said.

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