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Beware - EUR/CHF in Intervention Territory

Last updated 12/18/2009 10:51 AM ET (GMT -5) 19 Comments

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Kathy Lien

Director of Currency Research, GFT

The foreign exchange market is fairly quiet this morning with no U.S. economic data on the calendar.  All of the action happened overnight in EUR/CHF which broke the 1.50 handle during the Asian trading session.  The violent sell-off in the currency pair is indicative of all the stop orders that were sitting below 1.50.  Once that price level was broken, EUR/CHF plunged 100 pips in 5 minutes. Since then the currency pair has hung below 1.50, with the Swiss National Bank no where in sight.  

EUR/CHF in Intervention Territory

EUR/CHF is currently trading in intervention territory.  Although the Swiss National Bank has threatened to intervene throughout the year, there has only been two to three clear cases of intervention  in March and June.  The first bout of intervention occured when EUR/CHF traded around 1.48 and the next two were in the neighborhood of 1.50, setting this price level as the line in the sand for the SNB. Each time, the central bank intervention triggered to sell francs, they triggered a parabolic move in both EUR/CHF and USD/CHF.  

SNB Pledges Continued Intervention

When the Swiss National Bank met earlier this month, they pledged to continue to fight "any excessive appreciation of the Swiss franc against the euro."  In other words, they could come into market and sell Swiss Francs at anytime.  Yet even though the risk of intervention by the SNB has escalated significantly by the breakdown in EUR/CHF, it is important to realize that the Swiss economy has stabilized since March and June with GDP growth turning positive in the third quarter.  Inflationary pressures are also beginning to sneak up on the SNB, which may encourage them to be more cautious about intervention in an attempt to avoid the inflationary conditions that stemmed from currency pegging in the late 1970s. Nonetheless, we think the SNB is only waiting for more speculators to short EUR/CHF before intervening to get the most bang for the buck, a tactic often used by the Japanese.

The reason why currency traders are paranoid about intervention is because of the potential volatility in the Swiss Franc.  The following charts illustrate the parabolic moves in both EUR/CHF and USD/CHF whenever the SNB intervenes.  Traders don't want to be caught short during this time as the scope of the rallies can range anywhere from 200 to 600 pips.

June 24 EUR/CHF

June 24 USD/CHF

June 18 EUR/CHF

March 12 EUR/CHF

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Comments (19)

mynextgig

December 18, 2009 at 10:09 AM ET

Kathy,

Can you explain the dynamics of why the Stop orders sitting under 1.50 caused a sell off ? Why does this accelerate the short move when all the stop orders will be long trades and should reverse the movement.

Thx

FXDragon

December 18, 2009 at 12:48 PM ET

I think most traders were expecting an intervention at 1.5000 lowest. Actually 1.5020 was the line for summer months. After that it was 5080. Thats why you would see small spikes at those levels cause buy orders hit for longing.

Anyway 5080 stops were hit on nov26. After that 50 was stopped aand, waterfalls...
I'll start buying high leveraged around 1.49. Which could be your next gig. It's looking goood:)

Yeah so their longs get stopped at 50 and with that defense abolished, no stop till brooklyn.

Doobp

December 18, 2009 at 01:02 PM ET

I'm waiting for 1.48 actually. Although it's a good time to but in now, i have a feeling that eur may continue to fall in the coming few days. Thanks to PIGS

alexjbrandt

December 19, 2009 at 02:40 AM ET

I think the answer your looking for to your questions can be explained like this:

Say there is 100 people

50 people short the currency pair, and 50 people go long.

Then a person comes along, and shorts the pair, turning the market in favor of people who have shorted.

The market goes down a bit, hits a S/L on one of the longs. So now there are 51 people short, and 49 people long. Market momentum now picks up in favor of people who are short. Another long position is stopped out. This continues until all the long stops are blown, once all the stops are blown the bears have control of the market and price can drastically drop 100+ pips in a short time period. (like you witnessed) Obviously this is just a basic summary as there are many more variables at play in the real market.

alexjbrandt

December 18, 2009 at 10:34 AM ET

I'm afraid your chart of the "USD/CHF" highlighting the SNB intervention for June 26, says NZD/USD in the upper right portion of the chart. Unless the NZD/USD has something to do with the SNB intervention?

klien

December 18, 2009 at 10:50 AM ET

Thanks for picking up on that! Chart is fixed.

FXDragon

December 18, 2009 at 11:19 AM ET

Kathy,
When you wrote yesterday "bond prices are rising," which bonds are you talking about? Corporate bonds?

Thanks,

klien

December 18, 2009 at 11:20 AM ET

Treasuries.

FXDragon

December 18, 2009 at 11:33 AM ET

You wrote, "bond prices are rising and yields are falling," indicating risk aversion.

Did you not mean treasury yields also when you wrote "yields"?

klien

December 18, 2009 at 11:34 AM ET

Yes

Robert Taylor

December 18, 2009 at 11:19 AM ET

Kathy,

I like the EUR/CHF because of the low ATR and trade it quite a bit. Generally a 10 pip move for me is a victory. There probably isn't another cross pair with low ATR like this one but what would you recommend that is second best?

Many thanks

klien

December 18, 2009 at 11:23 AM ET

I think the lowest ATR besides EUR/CHF is EUR/GBP

Doobp

December 18, 2009 at 11:56 AM ET

i was surprised that eurCHF dropped under the 1.5 handle too. i'm looking to long it soon.

anyway, kathy, do you think the recent rally in USD will wear off in jan 2010? Also,i think it's clear that the plummett in eurusd is not the lone effort of USD rallying. Thus, hitting the formal high can be tough

ismael

December 18, 2009 at 12:06 PM ET

Kathy,

Why would the Swiss goverment want to lower the value of their currency? How would this a benifit to them? How would a Swiss intervnetion be benificial to the?. Does it have anything to do with tourism or andything related to tourism?

FXDragon

December 18, 2009 at 12:59 PM ET

So we can eat chocolate and wear watches cheaper and go skiing for holiday. So they better intervene pronto!

Actually i think France has better slopes.

Doobp

December 18, 2009 at 12:23 PM ET

pegging to euro?

ismael

December 18, 2009 at 12:36 PM ET

I see. Thank you for that Doobp.

schultzz.at

December 21, 2009 at 03:51 AM ET

The SNB softened its language at its last quarterly monetary policy assessment on Dec 10. In September they wanted to 'continue to act decisively to prevent any appreciation' now they want to counter any 'excessive' moves. They expect real GDP to decline 1.5% in 2009 and growth between 0.5% and 1%. They saw risks of deflation and considered it inappropriate to raise interest rates at the moment, but they stated that expansionary monetary policy can not be maintained indefinitely. Switzerland's unemployment rate was 4.1% in November.
According to the latest Statistical Bulletin (December) the SNB holds foreign currencies valued at 82 billion franc at the end of Q3/09. This compares with 49 bill. in Q3/08, 47 bill. Q4/08, 55 bill. Q1/09 and 81 bill. Q2/09. The euro accounts for 60%, the dollar for 26%, the Yen and Pound for approximately 6% each.
So the SNB intervened heavily in Q2, but was basically inactive in Q3 with Euro purchases of only 900 million franc.
The Euro performed very well since 2002 in a mild economic climate, it has yet to prove that it is able to withstand colder temperatures. EUR/CHF will most likely test its 2002 low around 1.4500.
If European governments fail to convince financial markets that they will return to the Maastricht criteria of 3% deficit/GDP and 60% debt/GDP in some years, the Euro may enter a period of free fall against other major currencies.

Doobp

December 21, 2009 at 01:16 PM ET

I agree.. with anymore negative news from PIGS, Euro may return to 1.30 range.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.