Once the shock of the SNB move to peg the franc at 1.20 or weaker against the EUR wears off, the burden of maintaining that peg will likely prove insurmountable for the SNB. Over the last 18 months, the SNB has lost approximately CHF 30 bln on its previous interventions at much, much higher levels in EUR/CHF.
Given the disarray in the euro zone, the tacit disapproval of the ECB to the SNB’s unilateral action, that lumpy 1.20 bid from the SNB may prove irresistible.
Just think about it: the SNB may have to buy billions of euros as soon as Wednesday if the German constitutional court scuppers the EU bailouts.
The peg will survive tomorrow, of that you can be sure. But can it stand the test of time? I suspect not.
Should we get several weeks of successful defense of 1.20, options volatility should plunge.
Low volatility means cheap options.
The way to be play may be to buy a deep out-of the-money EUR put/CHF call once markets settle down and await the inevitable failure of the Swiss to weaken their currency in a sustained way. Markets have blown currency pegs to kingdom come many times before (see GBP forced from the ERM in 1992 and the Thai Baht devaluation in 1997 as spectacular examples).
Switzerland will not run out of reserves like the BOE and the Thai central bank nearly did but they will run out of nerve once they acquire hundreds of billions of euros at a generous rate of 1.20…
