Category Archives: CHF

Incredible time to buy EUR/CHF

It’s not often that a trade comes along with so much upside and so little risk. Buying EUR/CHF at 1.2050 is one of those trades.

I didn’t think we would see 1.2050 in EUR/CHF this year and I’m sure it won’t last. My money says 1.25 is coming with 1.30 not far behind.

The SNB didn’t institute a peg to give it up 4 months later. These are serious people and all the credibility of the institution is on the line. With the situation slightly more stable in the eurozone at the moment, it’s all the more reason to be hold the peg.

The SNB releases balance sheet data later today and there are rumours of a hike in the peg. Don’t wait.

It’s not often that I’m extremely confident in a trade but if it goes bad, it’s only 50 pips. My stop is at 1.1999, no exceptions.


Why I Bought EUR/CHF

Buying EUR/CHF anywhere close to 1.20 will turn out to be the easiest trade of 2011. I bought the pair on Sept. 9 at 1.2066 and with a stop at 1.1945.

The story is well known. The Swiss National Bank pegged the franc to a minimum of 1.20 against the euro on Sept. 6. The result was a 10%, one-day move in EUR/CHF to slightly above 1.20 from 1.1019.

 The press release announcing the decision ( will go down in foreign exchange history. I spoke to a trade who put on a EUR/CHF long in the morning (with no limit), went to the beach and came home $10,000 richer. He said it was the best day of his life.

The SNB said it will enforce the peg “with the utmost determination and is prepared to buy foreign currency in unlimited quantities.” They are aiming for “a substantial and sustained weakening” of the franc and “will no longer tolerate” EUR/CHF below 1.20.

Most traders are stupid and the first thing they thought about was fighting the SNB the way Soros fought the Bank of England. (

This is nonsense. Britain was attempting to boost the value of its currency while the Swiss are attempting to devalue. Weakening a currency is easy, you just print more of it. In Switzerland’s case, they are printing it and buying European bonds. There is no limit to how much they can print and spend.

The second point to consider is credibility. I quoted the strong wording of the SNB because they have placed themselves in a corner. There is no way to back down. If they fail here, especially if they fail quickly, it would take years to restore their previous clout. Central bankers are extremely observant and protective of credibility and they’ve put every ounce of it on the line here. In doing so, they surely considered all the possible outcomes, including extreme turmoil in the eurozone.

The third point is carry. As in the money earned on interest. The CHF rate is 0.25% and the euro rate is 1.50%. Even if EUR/CHF stays precisely at my entry point the trade pays 1.25% per annum. With leverage, it’s much more. Over time, as the SNB demonstrates credibility, the carry trade will boost EUR/CHF.

These three reasons are more than enough to enter this trade. The fourth reason is a theory. The chief loser in this decision is the eurozone yet there has not been a single complaint. Swiss companies are now competing with their European counterparts at below-market rates. The secondary losers are the rest of the free-floating currency world, who also must compete with the Swiss at rate that doesn’t respect the market. Granted the CHF was in the midst of a tremendous rally prior to the announcement but, still, the international community has been silent at a time when rhetoric about unfair Chinese FX devaluation has ramped up.

Maybe there was an agreement prior to the SNB announcement. What would Europe want in exchange? It’s obvious. The SNB buying European bonds is mutually beneficial. It will lower borrowing costs and stabilize Switzerland’s trading partners. Specifically, I expect the Swiss to buy the bonds of neighboring Italy and France. For the rest of the world, an improvement in the stability of the eurozone is a small price to pay for giving up a slight competitive advantage to Swiss exporters.

Another curious event around the peg that raises my suspicions is the leak. It’s obvious that some traders had foreknowledge of the decision. EUR/CHF rallied 250 pips in the two hours before the decision.

It’s certainly possible that someone at the SNB leaked the decision. The knowledge was extraordinarily valuable. Even a small retail trader could have easily made $100,000. In 15 minutes with that information, I could put on trades that would net $1 million. A well-funded trading operation could easily have made $1 billion.

If you think those numbers are outrageous consider that UBS rogue trader Kweku Adoboli apparently lost $2 billion of his employer’s money on the CHF devaluation ( His employer? UBS, the Swiss banking giant. If anyone in Switzerland had foreknowledge of the peg it would have been them, and they certainly wouldn’t have lost $2 billion.

I don’t believe the leak came from the SNB. They’re Swiss bankers, people famous for keeping their mouths shut.

But if they discussed and cleared the plan with their neighbours, the secret would have been much more difficult to keep quiet. Perhaps the Italians talked? Perhaps the French? If we could follow the money, we might find out. But instead, let’s make money in our own way – trading forex.

The next question is: how high will EUR/CHF go? The SNB said the franc “is still high and should continue to weaken over time.” This tells me they are unlikely to act in order to drive EUR/CHF higher unless the economic outlook deteriorates or deflationary risks mount.

In this case, the unwind of specs, the aforementioned carry trade and an improvement in the European sovereign crisis will drive EUR/CHF to 1.25 and beyond. Yes, I said and improvement in the sovereign crisis. Greece will receive the next tranche of aid and that will eliminate any risk of default through year end. This alone will help stabilize EUR. Switzerland and other nations buying European debt will further fuel the trade.

Technically, EUR/CHF has bottomed and will continue to reverse. A clear inverted head-and-shoulders pattern is visible on the daily chart. And though the measured target of 1.39 is far fetched in the near or medium term, the direction is certainly up.

I will hold this trade until it hits 1.35 or until mid-December, whatever comes first.


July Trade Review: USD Longs (-60 pips)

USD longs versus CHF (at 80.12) and JPY (at 77.92) on July 27. Stopped out of both trades on July 29 July 29. Result: -60 pips

USDCHF trade analysis July 27
USD/CHF Hourly July 25-30
USDJPY trade analysis July 27-11
USD/JPY Hourly July 26-30

Entered with stops at 79.82 (30 pips) and 77.62 (30 pips). Greatest open loss: 30 pips. Greatest open gain: CHF +34 pips; JPY negligible

I entered this pair of trades at the same time. This was late on Wednesday, with a weekend debt ceiling deadline looming. The idea was simple: any good news about the US debt ceiling debate would lead to a pop in USD/JPY. At the same time, USD/JPY had leveled out around 0.8000 so it looked well supported.

What I should have known better: Never bet on the sanity of US politicians. They continued to bumble along until the weekend and eventually made a deal with hours to spare before the Aug. 2 deadline. Part of the reason I erred was because I believed it was necessary to have a deal before the weekend. Media reports mislead me. The lesson, I guess, it to only trade politics if you know the system inside out.

What I’m happy about: The stop was certainly in the right spot. I for 30 pips I bought myself 36 hours of negotiations. When the deal was finalized, it led to a 120 pip (JPY) and 140 pip (CHF) bounce. The rallies were about what I expected. So I took a gamble with 4×1 odds in my favour and lost on bad timing.


July Trade Review: NZD/CHF (-1 pip)

NZDCHF trade analysis FXButton
NZD/CHF daily May-Aug

 Entered NZDCHF short at 69.67 on 30 June. Exited  July 25 at 69.68. Result: -1 pip

This was one of two trades I entered in late June with wide stops. The reasoning was: 1) expectations of rising risk aversion. 2) Hikes overpriced from RBNZ. 3) Slowing in China. 4) Run-up beginning June 26 was overdone.

This trade went against me initially but I remained confident even when I was holding a loss of more than 100 pips. The 300 pip swing in my favour into July 11 was exactly what I was hoping for and it was precisely when all the reasons I entered the trade coalesced. The reason I didn’t get out of the trade with a large profit is quite sad… I wasn’t at my computer on July 11 and didn’t have a limit trade in place. At the very least, I should have lowered my stop to where I entered the trade, to lock in a profit.

What I’m happy about: The thesis for my trade was correct and I didn’t get shaken out early. I held the trade until it got back to my entry level.

What I should have known better: the T/P levels should have been ready. If not, I still had LOTS of time to get out with a 125+ pip profit from July 11-18. I stole a tie from the jaws of victory here.


The Debt Ceiling and QE3

Our base case is for a bounce in stocks and USD after a debt ceiling deal is reached. We see a 90% probability of a deal before markets open on Monday and we will continue to trade in that direction.

Our trades were working for us until late in the session Thursday when sentiment worsened after S&P sovereign-rating chief John Chambers re-emphasized the importance of $4 trillion in savings. Both parties are currently proposing less than $3 trillion in savings so it looks more likely that S&P will have courage to cut.

Republicans postponed a vote on Boehner’s debt ceiling plan minutes before it was scheduled, likely because they did not have the votes in their own caucus to pass it. In any case, the legislation had no chance of getting by the Senate or the White House, so the delay could be helpful for negotiations. A vote is expected later in the evening but it is unlikely to move markets.

VP Biden is said to be in talks with Senate Republican leader Mitch McConnell on a deal. McConnell earlier said THE ONLY REAL STICKING POINT between the two sides is a Republican insistence on a two-stage ceiling increase process. We see this as a good sign for our USD/JPY and USD/CHF longs. There are also reports that a short-term debt limit extension may be possible if no agreement can be reached.

The QE3 debate will re-ignite after the debt ceiling and downgrade drama passes. The Fed’s Lacker (voter in 2012) called the US recovery decidedly mediocre but said the factors that have held growth back are beyond the Fed’s control – a signal that he will not support further QE. He said the US doesn’t face a significant risk of growth below 2.75% in the next two years.

Separately, the Fed’s Williams (voter in 2012) said the Fed may need to increase stimulus but that there is a “high hurdle” before he will consider it.

A broad slate of economic data from Japan will be released at 2330 GMT including CPI, employment and household spending. Industrial production will follow 20 minutes later. All the data is for June. It’s difficult to strategize around these numbers because of potential skews from the disaster but overall we expect a straightforward reaction with JPY strength on upbeat growth numbers.


Buy USD on Debt Ceiling Resolution, RBNZ Holds

Not long ago, Geithner was pronouncing the US would never lose its top rating but now the market is in the process of pricing in a downgrade. The S&P 500 fell 2% to 1305 on Wednesday and is the process of putting in its worst weekly performance in almost a year. The consensus is that the US dollar will continue to fall but it may not be as straight-forward as advertised. A continued decline in the stock market will provide a safe-haven boost to the USD as will higher bond yields. The resulting slowdown in the US economy may also weigh more heavily on Canada with risks to the other commodity producers and the economies most tied to US consumption.

At the moment, the situation is looking dire but what’s has been lost is that DEBT CEILING NEGOTIATIONS ARE MAKING PROGRESS. Boehner is reworking his proposal and appears to have his own party on board. Reid is also looking for additional cuts in order to satisfy the dollar-for-dollar demands from Republicans. The sides now don’t appear all that far apart and we estimate a 75% probability that will we have the framework for an agreement before markets close on Friday.

This will present the opportunity for a significant relief rally in the time between the passage of the legislation and decisions about the credit rating. There’s also the distinct possibility that the ratings agencies don’t have the courage to downgrade the US. Based on this, there is room for a bounce in USD/CHF and USD/JPY — both may have stabilized and at oversold levels.

We will enter longs in both these trades ASAP. Follow @FX_Button  on Twitter for live updates

THE RBNZ HELD RATES AT 2.50% as expected and Bollard said the economy grew more strongly than expected. The central bank leader telegraphed an upcoming rate hike by saying there is little need for the 50 bps March “insurance” rate cut to remain “much longer”. The market has priced in 100 bps in hikes in the next 12 months but nothing beyond 50 bps is guaranteed. Bollard may have done a good job talking down NZD by nothing that if the currency’s strength persists, it will reduce the need for rate hikes.


US Dollar Declines, Swiss Franc Rallies on Debt Ceiling

The US dollar didn’t get the walloping some expected (or would like) on Monday despite slow progress in debt ceiling talks. The one exception was the Swiss franc which shot higher across the board on risk aversion.

Two debt ceiling plans were unveiled on Monday: 1) Senate Democrats proposed $2.7 trillion in savings over 10 years with nearly half coming from defense spending cuts. 2) House Republicans called for a two-part plan that would raise the ceiling $1 trillion this year and $1.6 trillion next with even larger spending cuts. The second tranche would require $1.8 trillion in cuts to Social Security, Medicare and other entitlements.

From this it looks like tax hikes (and tax reform) are less likely. It’s seems it’s just a matter of how much to cut and where but Bill Gross’ prediction that most cuts will be fiction and swamped by lower revenues is already ringing true.

What is also becoming increasingly clear is that this will not be a long-term solution. At best the ceiling will be raised until slightly beyond the 2012 election with very little meaningful reform to entitlements or a credible plan toward a sustainable debt load. This sounds to us like precisely the type of outcome that WILL RESULT IN A DOWNGRADE. If such a deal is announced, we don’t expect a downgrade immediately but it will not be advisable to hold USD because a downgrade could be announced at any time. We will have more about the impacts of a downgrade and potential trades in the days ahead.

The dollar would like have fallen farther but the idea that AUG. 2 ISN’T THE REAL DEADLINE as taken hold. S&P said the Treasury can stretch out the process beyond Aug. 11. Others say as long as Aug. 15.

Obama is scheduled to speak at 9 p.m. ET (1 a.m. GMT). The chief risk we see here is that Obama abandons his demand that the higher ceiling runs through the 2012 elections. This would probably pave the way for the outline of a deal sometime in the subsequent 48 hours.

Outside of the huge moves in CHF on Monday the forex market was tame. JPY and CAD were mild outperformers with GBP lagging. Gold gapped $14 higher at the open, ran as high as $1621 and closed at $1614. The S&P 500 fell 0.6% to 1337.

More on the Swiss Franc Rally

USD/CHF fell as low as 0.8020 on Monday while EUR/CHF remains about 180 pips above the record low of 1.1404.

The reasons for the CHF move: 1) Over the past several weeks some large operations shifted into USD/CHF longs. They were likely stopped out. 2) Technical selling on the break below the record low of 0.8081. 3) The market is pricing in a US downgrade and when the headline hits, the place you want to be is short USD/CHF.

The collision of these three factors today caused an outsized gain in CHF. To us, this move looks like it has gone too far, too fast. Momentum indicators are stretched and consolidation looks more likely in the next few days than declines below 80.00 – especially with the risk of a debt deal.