February 2, 2016 / 1:13 PM / 4 years ago

Options show investors bet on more Swiss franc weakness

LONDON, Feb 2 (Reuters) - Investors in the derivatives market are anticipating the Swiss franc will weaken further against the euro, as expectations grow that the Swiss National Bank will do more to drive down its value in the coming months.

One-month euro/Swiss franc risk reversals - a gauge of demand for options on a currency’s rising or falling - have flipped and are showing a bias towards franc weakness for the first time since late 2014.

The SNB meets on March 17, amid speculation that it will ease policy further, after the Bank of Japan this week became the latest major central bank to adopt negative interest rates.

Chairman Thomas Jordan said on Tuesday that the SNB would analyse the best response to the Japanese move, adding the recent weakening in the franc was partly due to negative Swiss rates and the threat of intervention in the currency market.

He declined to say if the bank had intervened in the past few weeks but reiterated that the franc was “significantly overvalued”.

The SNB worries that the European Central Bank, which also has negative deposit rates, will also ease further in March, a move that would tend to weaken the euro against the franc.

Swiss interest rates are now the lowest in the world. It charges 0.75 percent to hold cash deposits at the central bank and three-month Swiss franc Libor rates are around -0.75 percent.

Analysts at Morgan Stanley say Swiss money markets are pricing in around 15 basis points of cuts by June.

“The SNB wants to keep the Swiss rate differential with the rest of the world wide to support outflows from Switzerland, weakening the franc,” said Hans Redeker, head of global FX strategy at Morgan Stanley.

“However, what to do when the rest of the world is coming closer to their deeply negative rate? Markets believe that moving even lower may be an answer.”

That, along with talk that the SNB has been intervening, have seen the Swiss franc shed over 2 percent so far this year.

The franc fell to 1.1165 franc per euro last week, its lowest since Jan. 15 last year, when the SNB lifted a 3 1/2-year-old cap limiting the value of the franc to 1.20 franc per euro.

The franc tends to gain in times of market stress but has not done so this year. The Japanese yen, another perceived safe haven, rose as stocks and oil fell in January but has fallen since the BOJ adopted negative rates. (Editing by Larry King)

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