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Throwing in the Towel on EUR/CHF Long

Last updated 8/3/2012 12:56 PM EST (GMT -5) 4 Comments

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Matthew Weller

Technical Analyst, GFT

Follow @MWellerFX

If you’ve traded for any period of time at all, you’ve probably had a trade that did not immediately move in your favor. In these cases, the best course of action is to objectively analyze the trade (easier said than done) and determine whether your thesis is still valid. In the case of my long EUR/CHF trade from way back in January , the initial thesis clearly has not played out as expected and recent reports suggest that the risks have now turned to the downside.

When the Swiss National Bank originally enacted a floor for the EUR/CHF at 1.20, most traders (including myself) anticipated that the SNB would defend that level aggressively, like the Bank of Japan had on numerous occasions. In those cases, the BOJ pushed the USD/JPY up hundreds of pips over just a few hours. As time has passed though, it’s become more and more obvious that the SNB is comfortable to let the EUR/CHF languish just above the 1.20 level, removing a primary reason for entering the trade.

In addition, recent data suggests the Swiss National Bank is having maintaining the floor. In order to defend this floor, the Swiss National Bank is forced to buy Euros any time the EUR/CHF approaches 1.20, which lately has been pretty much constantly. As the Financial Times outlined earlier this week , the SNB has had tremendous difficulty diversifying its euro exposure; in fact, the bank has accumulated nearly SFr 100 Billion of euros in the last quarter alone (an 80% rise in euro reserves!).

No doubt the governing board is growing more and more concerned with this growing pile of Euros by the day. And with recent events suggesting that EU / ECB leaders are out of touch with the worsening situation on Italy and Spain , many fear the euro may be headed lower in the immediate future. All of these factors increase the risk that the SNB may have to lower or even eliminate the EUR/CHF peg in the future.

At this point, the most prudent course of action would be to close the trade out near current market prices (1.2012) for about a 40 pip loss. As a silver lining, the differing interest rates between the Eurozone and Switzerland have benefitted traders over the past 6 months, albeit only to the tune of about 9 pips by my calculation, but it does partly ameliorate the loss.

With some trades, the immortal words of William Shakespeare, “the better part of valor is discretion,” point to the best course of action. By closing this uninspiring trade for a small loss, we will be able to focus more attention on trades with better profit prospects in the future.

Potential Strategy: Close open EUR/CHF long at market (1.2012).

For more intraday analysis and trade ideas, follow me on twitter ( @MWellerFX ) and attend our daily Live Market Analysis webinars. Visit your local GFT website under “Seminars and Webinars” to sign up.

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Comments (4)

Mark McCoskey Trading

August 03, 2012 at 05:01 PM ET

I closed out my position just prior to market close. Since I bought in at 1.2008, I was fortunate enough to bank a small profit. Thanks Matt!

MWeller

August 06, 2012 at 06:35 AM ET

Glad to hear it Mark!

Justin Parizi

August 03, 2012 at 09:56 PM ET

I dont understand how strong US jobs data reflects a weak US dollar. The move on EUR/USD and AUD/USD blew my logic, really? Markets are THAT volitile? It was like grandpas house all week and the last 3 hours was WW3. fake out break outs

MWeller

August 06, 2012 at 06:39 AM ET

Hi Justin - depending on the type of environment we're in, a strong NFP report will often lead to weakness in the U.S. Dollar. A strong jobs report can make traders feel more confident in the world economy as a whole, causing them to move money from "safe haven" currencies like the USD and JPY and into higher-yielding currencies like the AUD.

And yes, last week was relatively unusual because of the highly anticipated news announcements on Thursday and Friday - volatility should be much more evenly distributed this week.

Let me know if you have any more questions!

-Matt

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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.