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Derivatives

Speculators Pile In As Dollar/Swiss Vol Rockets

Implied volatility on the U.S. dollar/Swiss franc jumped over 90 basis points last week after hedge funds piled into the currency pair.

Implied volatility on the U.S. dollar/Swiss franc jumped over 90 basis points last week after hedge funds piled into the currency pair. In the spot market the Swiss franc depreciated to CHF1.1572 last Wednesday compared to CHF1.1415 the previous Friday. Hedge funds were buying at-the-money options across the curve and one-month implied volatility jumped to 10.74% last Wednesday against 9.82% the Friday before.

"The speculators are not really playing a directional move," noted one trader, who said demand was for at-the-money options on dollar/Swiss, with maturities of around six months. The turn around in the Swiss franc's performance was also met with an about turn in funds' options strategies. When the Swiss franc was appreciating options traders were selling short-dated at-the-money options to cover the run up to the Christmas break.

Traders do not expect implied volatility on the pair to come off before the Swiss National Bank announces its monthly monetary policy assessment on Thursday. "All eyes are on the SNB," added the trader. He expects some of the funds to unwind short positions after this date.

Ian Stannard, currency strategist at BNP Paribas in London, said the SNB is not expected to change interest rates. "Some of the recent data from the Swiss has been on the weaker side," he noted. This does not mean the dollar will remain at CHF1.15 against the Swiss franc, said Stannard. "We think the [dollar correction] will be short-lived," he added.

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