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George Dorgan
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George M. Dorgan is financial consultant and portfolio manager on global macro basis for several independent Swiss financial advisors. Formerly he worked at UBS and Reuters.
My company:
SNBCHF.COM
My blog:
The Swiss National Bank and Swiss Franc Blog
  • Negative UBS/CS Interest Rates And Arbitrage Trading On Gold, CHF, Brent 0 comments
    Dec 4, 2012 6:11 AM | about stocks: FXF

    Credit Suisse and UBS will charge negative interests for cash clearing clients above a threshold. Last year such news was worth 250 bps, on December 3 only 28 bips.

    One remembers August 26, 2011, when UBS only spoke of negative interests and consequently EUR/CHF rose from 1.1420 to 1.1688. At the time FX traders and speculation were the main drivers of the EUR/CHF.

    "After record demand for the franc, UBS said it was monitoring franc cash balances in the current accounts of its franc clearing customers. The news helped the euro climb more than 2% against the franc to a one-month high ." The Guardian August 26, 2011

    Now both CS and UBS seem to be really introducing negative interest rates on some clearing customers. But the result on EUR/CHF is a very, very poor improvement from 1.2059 to 1.2090.
    This might mean that most FX traders are out of this pair, they have been deceived too many times going long EUR/CHF. Clearing customers are for us mid-term money, with a horizon a bit higher than FX traders.
    One can imagine where the fair value models of big investment banks currently price the EUR/CHF, if even such important news do not give a strong push to EUR/CHF. See the official news at FT Alphaville

    Update December 04

    FX traders have understood the importance of negative interest rates on big clearing account balances. Like usually they overweight the importance that some clearing accounts have when compared total CHF investments.

    But there might be other factors.

    Steve Collins@TradeDesk_Steve

    Someone just mentioned to me, this strategy suits perfectly SNB ..or may be this is the CB using CS and UBS as submarine to weaken the CHF

    4 Dec 12

    HFT repercussions on gold and silver

    European trading is often dominated by (high frequency) trading algorithms that correlate one asset to another. Fundamental news are less important.

    EUR/CHF is currently up to 1.2110 due to the negative interest rate news. USD/CHF up 0.06%

    Gold is correlated to CHF with a bit higher volatility, fell consequently by 0.86%. The correlated silver (even higher volatility in the algo) is weaker by 1.14%. But other commodities like Brent did not depreciate as they should when gold weakens.

    Maybe caused by the bad gold performance, stocks are up despite rather bad european fundamental data.

    Why didn't EUR/CHF rise more on December 3 ?

    The bad ISM manufacturing index made the US dollar weaker. Usually the euro and to a bigger extend the Swissie and the yen appreciate with bad US data. Gold was rather unchanged after better than expected euro data and bad US data.

    Therefore yesterday's movement in EUR/CHF was not that strong.

    Arbitrage trade recommendation

    We recommended trading long EUR/CHF with target 1.2190 (September highs) and long gold with target 1720. Additionally some short Brent. This is an arbitrage trading strategy.

    During American trading, the algorithm correlation between gold and CHF will be broken at least partially. Fundamental factors will count more than simple algos. And these fundamental factor suggest that gold must appreciate, when there is repression on CHF holdings.

    Disclosure: I am long GLD.

    Stocks: FXF
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