USD/CHF traders are nervous of being ‘caught short’ ahead of SNB
Futures traders may be heavily net-short Swiss Francs, but the rapid rise of the currency this week ahead of the SNB meeting suggests some are wary of being caught short a less-dovish central bank.
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All eyes are on the Swiss National Bank (SNB) and Bank of England (BOE) for today’s interest rate decisions, although it is the former which will likely garner the most attention. The SNB surprised markets with a cut in March and bets were on for another cut in June. Yet the rate of their lowing inflation has declined, GDP was stronger than expected and the central bank seems to have switched tactics with the Swiss franc, saying a weaker currency is a threat (for more) inflation.
As cutting rates could weaken the currency, it remains debatable as to whether they will have the appetite to do so today. And with the vast majority of futures traders remaining net-short the Swiss franc, a hold could pave the way for short covering and a weaker USD/CHF. Understandably, implied volatility for USD/CHF has spiked ahead of today’s SNB meeting.
With that said, there has clearly been some short covering this week ahead of the meeting as traders are clearly nervous of being ‘caught short’ should the SNB hold and signal no more cuts. And that could actually create a decent opportunity to short Swiss francs again should the SNB surprise with another cut today. Either way, the meeting in a few hours is one to keep on the radar.
USD/CHF technical analysis:
The daily chart shows that a bearish trend has been developing on USD/CHF since the May high, when SNB chairman changed his tune on a weaker currency. Prices broke beneath key support including a 38.2% Fibonacci level and the February high. Next support sits around 0.88 near the high-volume node (HVN) of the prior rally. Note that the lower 1-day implied volatility band sits just beneath this level.
Even if the SNB hold and potentially send USD/CHF higher, the bias would be to seek evidence of a swing high to short at more favourable prices. Because now we know the SNB do not want a weaker currency, fighting them could provide futile which means rallies could be made to fade.
-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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