| NEW YORK, June 14
NEW YORK, June 14 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
"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.