- We have been voicing our views on the Australian dollar “AUD” for the last couple of months. For a primer, please check out our previous posts: The Aussie Dollar, In A Checkmate! and Australian Dollar – A Bearish Outlook But A Bullish Set-Up.
- Protection is cheap:
- Despite the most heightened uncertainties surrounding China, North Korea, Middle-East, Russia, Turkey, Trump, etc. protection is cheap.
- Global markets are not prepared for a risk-off scenario.
- In times of crises, during a risk-off mode, the US dollar, the Japanese Yen and the Swiss Franc are seen as currency safe-havens.
- “Ranaldo and Söderlind (2010) showed that the yen and Swiss franc appreciated in a systematic way when risk peaked… De Bock and de Carvalho Filho (2013) found strong evidence for the same conclusion – returns on the yen and Swiss franc outperformed those of all other currencies when risk spiked.” – Adrian Jäggi, Martin Schlegel, Attilio Zanetti.
- The Swiss National Bank’s (SNB) balance sheet size to GDP ratio is nearly 100%, higher than BOJ’s which is at 90% of Japan’s GDP.
- We will not dare assume that the probability of a currency intervention by the SNB is zero but we do think that the bar for a new round of currency intervention is high considering SNB’s obese balance sheet.
- China devaluation risks have disappeared only from the minds of traders.
- Being short the Australian dollar against the Swiss Franc, in our view, is the best way to capture this risk premium.
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