Credit Suisse and UBS will charge negative interests for cash clearing clients above a threshold. Last year such news was worth 250 bps, on December 3 only 28 bips.
One remembers August 26, 2011, when UBS only spoke of negative interests and consequently EUR/CHF rose from 1.1420 to 1.1688. At the time FX traders and speculation were the main drivers of the EUR/CHF.
“After record demand for the franc, UBS said it was monitoring franc cash balances in the current accounts of its franc clearing customers. The news helped the euro climb more than 2% against the franc to a one-month high .” source
Now both CS and UBS seem to be really introducing negative interest rates on some clearing customers. But the result on EUR/CHF is a very, very poor improvement from 1.2059 to 1.2090.
This might mean that most FX traders are out of this pair, they have been deceived too many times going long EUR/CHF. Clearing customers are for us mid-term money, with a horizon a bit higher than FX traders.
One can imagine where the fair value models of big investment banks currently price the EUR/CHF, if even such important news do not give a strong push to EUR/CHF.
Update December 04
FX traders have understood the importance of negative interest rates on big clearing account balances. Like usually they overweight the importance that some clearing accounts have when compared total CHF investments.
But there might be other factors.
Someone just mentioned to me, this strategy suits perfectly SNB ..or may be this is the CB using CS and UBS as submarine to weaken the CHF
— Steve Collins (@TradeDesk_Steve) December 4, 2012
HFT repercussions on gold and silver
European trading is often dominated by (high frequency) trading algorithms that correlate one asset to another. Fundamental news are less important. CHF is trading now around 1.2120.
The correlated silver (even higher volatility in the algo) is weaker by 1.14%. But other commodities like Brent did not depreciate as they should when gold weakens. Brent is still trading around 110.
With the bad gold performance, even stocks are up despite rather bad european fundamental data.
Why didn’t EUR/CHF rise more on December 3 ?
The bad ISM manufacturing index made the US dollar weaker. Usually the euro and to a bigger extend the Swissie and the yen appreciate with bad US data. Gold was rather unchanged after better than expected euro data and bad US data.
Therefore yesterday’s movement in EUR/CHF was not that strong.
Arbitrage trade recommendation December 04
We recommend trading long EUR/CHF with target 1.2190 (the October highs) and long gold with target 1720. Additionally short Brent to hedge generally falling commodity prices. This is an arbitrage trading strategy.
During American trading, the algorithm correlation between gold and CHF will be broken at least partially. Fundamental factors will count more than simple algos. And these fundamental factors suggest that gold must appreciate, when there is repression on CHF holdings.
Portfolio composition for arbitrage trading
Gold has twice the volatility EUR/CHF has, Brent has three times the volatility EUR/CHF has. An example composition of the arbitrage portfolio would be:
- 33% EUR/CHF long, for example 100000 EUR/CHF long (vola 1)
- 33% gold long, e.g. 50000 EUR long (vola 2), which is 40 ounces of gold (at 1705 USD)
- 33% Brent short, e.g. 33330 EUR short (vola 3), which is 440 Brent barrels (at 110 USD)
Result of the arbitrage trading strategy by December 06
By December 06, the EUR/CHF has fallen from 1.2120 to 1.2097, 23 bps loss, applied to 10000 EUR this is around 230 USD loss.
Gold has fallen from 1705 to 1700, a small loss of 200 USD.
Brent has fallen by nearly 3% to 106.85: 440 barrels, gives a gain of 1320 USD.
The total gain is around 900 USD.
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Tags: Brent Oil,Capital Controls,Credit Suisse,Gold,negative interest,Swiss National Bank,Switzerland,UBS