Insights 
VT 
Swiss Franc and Eurozone Update
The EUR/CHF currency pair trades at approximately 0.9287, maintaining a near two-week high as the Swiss Franc weakens due to reduced safe-haven demand. Recent Eurozone inflation data displays movement towards the ECB’s 2% target, with core inflation rising by 0.3% in October and remaining steady at 2.4% annually, slightly above expectations.
Headline inflation increased by 0.2% month-on-month in October, matching forecasts with an annual rate of 2.1%, a slight decrease from 2.2% in September. The ECB held key interest rates steady, noting inflation is close to their medium-term target, without altering the inflation outlook.
Swiss data showed Real Retail Sales increased by 1.5% year-on-year in September, surpassing a forecast of 0.3% and recovering from August’s decline. SNB member Petra Tschudin stated the Franc’s impact on inflation is more important than its actual level, with the SNB ready to intervene in the currency market and reintroduce negative interest rates if needed.
The divergence between the European Central Bank and the Swiss National Bank is becoming more pronounced. The ECB appears content with its current “on-hold” policy as inflation approaches its 2% target. This contrasts sharply with the SNB’s explicit readiness to weaken the franc through market intervention or even negative rates.
Given this outlook, we see value in establishing long EUR/CHF positions through call options in the coming weeks. Options provide a way to gain upside exposure while strictly defining risk to the premium paid. This is prudent, as any surprise verbal intervention from the SNB could cause sharp, albeit likely temporary, downward spikes.
Divided Economic Policies
The ECB’s stance is supported by headline inflation easing to 2.1%, while recent data we’ve seen shows Swiss inflation remains muted at just 1.4%. This gives the SNB significant room to maintain its expansive policy, especially as Eurozone economic sentiment, while still negative, has shown slight improvement in recent surveys. This fundamental gap in inflation and policy is likely to be the main driver for the pair.
We must not underestimate the SNB’s commitment, remembering the market chaos when they removed the franc’s peg back in 2015. However, their current threats are actively suppressing the franc’s value, which is precisely their goal. With 1-month implied volatility for EUR/CHF trading at a relatively low 4.5%, the cost of buying calls to position for a gradual move higher appears attractive.
