THIS Time A Swiss Franc Hedge Makes More Sense

(This is an excerpt from an article I originally published on Seeking Alpha on November 6, 2016. Click here to read the entire piece.)

Analysts are once again making a case for using the Swiss franc (FXF) as a hedge against a big event. Last time, the franc was supposed to be a hedge against Brexit. I argued at the time that the currency was a poor choice. That argument happened to prove correct although my extrapolation to a bottoming for the British pound (FXB) was premature (more on that bottoming process in a coming piece). This time around, analysts are arguing that the franc would serve as a good hedge against the U.S. Presidential election….and THIS time, I agree.

Bloomberg lays out the argument in “Swiss Franc Offers Best of Both Worlds for Hedging U.S. Election” (mostly in the accompanying video). Essentially, there is a surprising divergence between the Euroswiss futures yield and the Swiss franc. {snip}


A trading opportunity has arrived in the form of rate/currency divergence despite presumed event risk from the U.S. Presidential election.
A trading opportunity has arrived in the form of rate/currency divergence despite presumed event risk from the U.S. Presidential election.

Source: Bloomberg

Just as with the Brexit hedging argument, analysts assume the franc will not move much on the expected outcome of the U.S. Presidential election. {snip}


EUR/CHF is near the post-Brexit low and its low for the year, but still well above levels seen for almost half of 2015.
EUR/CHF is near the post-Brexit low and its low for the year, but still well above levels seen for almost half of 2015.

Source: FreeStockCharts.com

Speculative positioning also suggests there is an opportunity to use the franc as a hedge. {snip}


Net shorts are on the move against the Swiss franc.
Net shorts are on the move against the Swiss franc.

Source: Oanda’s CFTC Commitment of Traders

I have not traded the Swiss franc in a very long time. Like many traders, I have absolutely no trust in the Swiss National Bank (SNB)… {snip}



Be careful out there!

Full disclosure: net short the euro, net long the British pound

(This is an excerpt from an article I originally published on Seeking Alpha on November 6, 2016. Click here to read the entire piece.)

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