Tag Archives: chf

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 (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) 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. (http://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp#axzz1Y4w7gDfD)

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 (http://www.zerohedge.com/news/ubs-rogue-trader-had-been-reduced-watching-fox-news-guidance). 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.


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.