(Adds missing word "than" in penultimate paragraph)
* Swiss franc falls to 13-month low versus euro
* Currency options indicate further franc losses
* Easing euro crisis worries help common currency
By Anirban Nag
LONDON, Jan 15 Investors are betting the Swiss
franc is in for a sustained period of weakness against the euro
as worries about the debt crisis wane, sapping demand for a
currency seen as a shelter in turbulent times.
In a trend likely to be welcomed by the central bank, the
franc fell to its lowest against the euro in 13 months
on Tuesday. Losses accelerated after European Central
Bank chief Mario Draghi last week dashed expectations of an
interest rate cut in the near term and said financial conditions
in the euro area had improved.
The euro rose to 1.2390 francs on Tuesday, up 2.6 percent
this year and a sharp turnaround from a 0.7 percent 2012 loss.
The pair had until recently traded in a very tight range
since the Swiss National Bank imposed a cap on the franc at 1.20
per euro in September 2011 to stop the export-driven economy
from sliding in a recession.
Throughout much of 2012, with the euro zone crisis raging,
the central bank intervened regularly to prevent the franc
All that has changed.
"We expect the euro/Swiss franc at 1.24 francs in 12 months,
although given the way it is going, it will easily overshoot
that forecast," said Marcus Hettinger, FX strategist at Credit
Suisse, Zurich. "Risk appetite is improving and there is less
demand for the safe-haven Swiss franc."
The drop in the franc has led to increased demand for
hedging in the options market against further weakness in the
currency. This has resulted in a sharp rise in the cost of
betting on further euro gains against the franc.
One-month implied volatility, reflecting demand
to buy options giving investors the right to buy euros against
francs at a set time in the future, has risen to 6.1 percent
from around 2 percent before the ECB rate decision on Thursday.
"Not many had positioned for this move in the euro/Swiss
franc spot," said a chief options trader at a large European
bank in London. "As a result, implied volatilities have
exploded," he said, adding bets are being laid for the euro to
rise to 1.25 francs in the next six months.
Risk reversals, a measure of the relative demand for options
on the euro rising or falling against the franc, are showing a
bias for euro gains in the near term, having barely moved for
most of last year.
More significantly, one-year risk reversals are turning in
favour of the euro, indicating that the Swiss franc's weakness
could be prolonged.
The one-month euro/Swiss franc risk reversal
was traded at a premium of 2.5 vols in favour of a stronger euro
on Tuesday, rising from around 1.4 at the start of the week.
One-year risk reversals have fallen sharply,
showing only a marginal bias for euro weakness and could flip to
reflect euro strength soon.
"Risk reversals haven't been this skewed in favour of euro
calls in the last 10 years," Kit Juckes, currency strategist at
Societe Generale said in a note. "The SNB has won its battle,
UNWINDING LONG SWISS BETS
The Swiss franc has long been a favourite among investors
seeking safety from the euro zone debt crisis much to the
discomfort of the SNB. The franc's strength raised worries that
the Swiss economy could slide into recession, forcing the SNB to
impose the cap.
Analysts said the SNB would be happy with the latest
weakening trend and decrease pressure on it to intervene.
Many speculators and hedge funds have already unwound bets
in favour of the franc and some analysts said this could herald
a period of sustained weakness akin to that in the Japanese yen.
In October, when the dollar began its ascent against the yen
on expectations of easier monetary policy, it rose 2.3 percent
before gathering pace and jumping more than 5 percent in
"The recent move in euro/Swiss franc is starting to resemble
that of the dollar/yen move in its infancy a few months ago,"
strategists at UBS said in a note summing up the Swiss bank's
(Editing by Nigel Stephenson)