UBS comments:
"This week in Geneva, Swiss National Bank board member Danthine gave a public presentation on the Swiss franc and domestic financial markets. It was clear from his speech that the SNB remains highly committed to its new exchange rate target of a minimum floor of 1.20 for EURCHF. At the same time the central bank continues to see the Swiss franc as being high still at current levels. As a result Danthine warned that further measures will be taken if the outlook for the economy or deflation risks justify it.
We were particularly struck by Danthine - an academic economist who published his first paper in 1977 on efficient markets - claiming that there was no free lunch in financial markets and that he believed very much in the efficient markets hypothesis. At the same time Danthine argued there were times when intervention was justified in order to 'co-ordinate' market participants when financial markets had become unstable. Given Danthine concluded his speech by saying he expects the franc to weaken and that the SNB will keep observing the 1.20 floor for EURCHF, he implied there was a free lunch on offer now to investors to short the franc from its current levels around 1.22.
This matters because the actions of the SNB have transformed the franc from 'being the new Deutschemark' to 'becoming the new euro' in our view. In facing an asymmetric target on the franc, investors may begin to use the currency as a substitute when shorting the euro, given its upside against the latter is now capped. Thus USDCHF longs will potentially have more upside than EURUSD shorts."
