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EUR/CHF: Keeping Faith in the SNB

Last updated 1/24/2012 12:52 PM EST (GMT -5) 4 Comments

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Matthew Weller

Technical Analyst, GFT

Follow @MWellerFX

The EUR/CHF has been on a rollercoaster ride of fundamental news lately. Two weeks ago yesterday, former Swiss National Bank president Philipp Hildebrand resigned amid allegations of insider trading on the part of his wife. In the wake of Hildebrand’s resignation, traders immediately began to call into question the SNB’s explicit 1.20 peg in EUR/CHF.

However, in a newspaper interview late last week, interim SNB president Thomas Jordan asserted that the SNB will continue on the same path as before. When asked what would happen if the EUR/CHF dropped to 1.20, Jordan unequivocally affirmed the floor “will be defended at all costs, as there is no alternative.” As my colleague Kathy Lien noted immediately in the wake of Hildebrand’s resignation, “given how successful the peg has been, it is extremely unlikely that the Swiss National Bank will move away from the peg…” However, the market remains skeptical of the SNB’s resolve; the fundamental uncertainty has pushed the EUR/CHF to fresh 4-month lows below 1.2100 earlier today.

The ongoing fundamental drama presents an opportunity for a strong risk/reward trade opportunity if traders test the SNB's mettle. In addition, technical support on the EUR/CHF is anticipated at 1.2020 (the lowest post intervention price), and as a result, traders could look for buying opportunities on any additional dips.

Specifically, traders could set a limit buy order at 1.2055 (near today’s lows) with a stop at 1.1970 (below the 1.20 floor) and a target at 1.2225 (representing a 200+ pip rally from the floor). More aggressive traders may simply choose to enter at market, but with the trade parameters outlined, this trade would offer a very compelling risk/reward ratio, with 2 pips of potential reward for every pip of risk.

Potential Strategy: Buy if EUR/CHF drops to 1.2055, stop at 1.1970, target at 1.2225

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Comments (4)

moonie

January 24, 2012 at 02:28 PM ET

OK. I'm in on this one.

mbrad77

January 25, 2012 at 11:51 AM ET

I wonder if there is a possibility for stop order slippage below 1.20, and the stop getting filled somewhere below 1.1970 which would skew the risk reward ratio

MWeller

January 25, 2012 at 01:01 PM ET

Interesting point mbrad - there is the potential for a cascade of sell stops below 1.20, but I think its more likely that the SNB will intervene prior to the 1.20 floor. From a psychological perspective, it would keep traders more on edge if they did not know precisely where the SNB could intervene.

Also note that even with 30 pips of slippage, which would be extremely high in the absence of a large news announcement, the Risk/reward ratio would still turn out better than 1.5 pips of reward for each pip of risk.

mbrad77

January 27, 2012 at 12:05 PM ET

you're right, thanks..

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About The Author

Matthew Weller has been actively trading the various financial instruments including stocks, options, and forex since 2005. From his first exposure to forex, Matt was fascinated by the vast liquidity and volatility offered 24 hours a day in the forex market. He has specialised in currency trading ever since.

Matthew focuses on candlestick patterns and pivot points to identify logical trade entries and exits. In addition, he has discovered a passion for teaching others about trading and has conducted over 400 educational webinars on different aspects of trading the forex market. His analysis has been quoted in Reuters, MarketWatch, and on the NASDAQ newswires.