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USDCHF - A French Election Trade

Market participants, remembering the impact of Brexit, have their focus on France this weekend. The last thing I want to do is add into the mix my futile hunches regarding the probabilities of various winning candidate permutations. Furthermore, wI won’t even speculate how the market will react to any particular second round match-up.

The purpose of this note is to discuss a rare, tactical conviction over this weekend. Staying COMPLETELY AGNOSTIC as to whether the election outcome will be taken as Eurozone positive or negative, consider USDCHF. 

Scenario I
The outcome is perceived as negative; fueling French EU exit fears (‘disenfrancising’) and risk-off trades such short USDJPY, short equities, and long US Treasury bonds are expected to benefit. EURUSD is likely to fall and underperform CHF. However, given the close linkages, CHF is likely to be dragged down by the EUR and, unlike JPY, underperform the US dollar. So, in this scenario, we expect USDCHF to gain.

Scenario II
The outcome is perceived as positive; risk-on trades, such as long equities, are expected to benefit. US and European risk-free rates are likely to trade higher.  EUR will likely outperform CHF and possibly by a lot, as Swiss interest rates are more pinned, and USD will rally against safe harbor currencies such as JPY and CHF. So, in this scenario, we expect USDCHF to appreciate.

To re-cap, USDCHF goes up, or USDCHF goes up.

It is important to underscore that when I talk of tactical conviction, I don’t mean “I am positive that this trade will make money,” rather I mean “I am convinced that this is a positive expectation trade.”

Markets are finicky, and even with the logic above I can assign no higher than 60% chance of being correct.

And we I am fully prepared to be completely wrong.

Hence, I am purposefully posting at the end of the trading day not to entice the reader to follow our trade, but to share and “timestamp” my thinking, which typically applies to the long investment horizon, but in this unique case may have a short-term value.

Good luck this weekend!