As Athens threw the future of the euro project in doubt by failing to form a government after its recent election, hedge fund sales of EURCHF were the third largest on record last week, according to client flow data from UBS. Geoffrey Yu, strategist at UBS, says that points to renewed speculation that a break in the floor is possible, despite the SNB’s protestations to the contrary.
“Last week’s flow may have been a one-off, even if it was testing the waters of the SNB’s resolve,” he says.
“However, the wider circumstances for EURCHF have changed and a Greek exit from the eurozone would prove a stern test for the SNB.”
| G10 weighted flow momentum |
| Source: UBS |
The SNB implemented its floor in EURCHF in September in a bid to contain what it described as a “massively overvalued” franc. The central bank has said it will defend the SFr1.20 level with all means necessary.
While the SNB fought off an attack on the floor in April, there are some that speculate that the central bank’s disposal of euros in the first quarter points to fading commitment to its intervention policy.
A Greek exit from the eurozone would only put further pressure on the SNB, as investors rush to preserve capital in the relative safety of the franc.
As well as hedge funds, UBS says that last week also saw the third-largest selling of EURCHF across all client types, with sizeable selling also coming from asset managers.
Indeed, asset managers engaged in their heaviest selling of euros since November, as fears heightened over Greek and peripheral eurozone debt ahead of the European Central Bank’s (ECB) first long-term refinancing operation.
Yu says that real money managers do not want to take chances ahead of the second Greek general election, slated for June 17.
He says, given the heavy flow of asset managers – absolute volumes in EURUSD were the second largest this year on a weekly basis, according to UBS – he suspects a lot of the underlying flow involved deleveraging from eurozone assets, most likely in sovereign paper or securities with similar exposures.
“This would only add to the pressure on sovereign spreads, and on the ECB to act before price action runs beyond their control,” says Yu.