Also, I have been running various scenarios thru my mind on EUR/CHF…..both on a collapse and on a strong rally…and the likelihood of each. Any particular thoughts on this pair?
As for EUR/CHF, there are always both bullish and bearish scenarios. However, with some macro research and analysis of the environment and central bank officials statements, you can see what the bias is.
In the most recent SNB monetary policy assessment, the SNB left the 1.20 minimum rate unchanged. They also adjusted their inflation forecast downwards. Meaning they expect inflation to be lower than previously expected. And if they expect inflation to be lower than expected, and they believe the Franc is still high and threatening the economy, then they will keep the 1.20 minimum rate unchanged.
It really doesn’t cost them anything since if the natural macro buyers can keep the rate in the 1.21 – 1.23 range, they don’t have to buy anymore EUR/CHF. They can just sit on their positions. Their capital base is not being eroded, so they are in a comfortable spot. And they are not dumb to remove the peg and suffer $10 – $50 billion dollars of losses on their hundreds of billions of EUR/CHF they already own. Therefore the downside is limited.
I still think there is upside potential. The medium probability / extreme scenario is for the SNB to raise the minimum rate, or institute other policy weakening options. But that is a long shot in the current environment. The EUR/CHF can strengthen and rise with natural macro forces if the environment is one of risk appetite and improving EZ economic conditions. Or if the market can gun the topside stops and get the market caught short vol and players scrambling to buy EUR/CHF to cover their option liabilities. Throwing on risk aversion trades over the past few months has not worked out very well, such as trying to buy the JPY or CHF or short stocks, etc. Risk aversion trades haven’t worked out well, and barring some major shock, I would expect those conditions to continue.
The problem with the EUR/CHF upside is that there is no policy drivers or catalysts behind it. Going long EUR/JPY gets helped by dovish JPY catalysts. Going long EUR/USD can get helped by short covering and potential dovish FED if they continue max QE. But going long EUR/CHF is not helped by any catalysts at the current moment. Also economic data out of France has been deteriorating, which is worrisome to me. The market has been shrugging off part of it, but if it is a harbinger of things to come, then there can be renewed tensions in the Eurozone, which would lead to EUR/CHF topside being capped.
The other part of the equation is not just whether you want to go long, go short or do nothing. It is also the reward risk ratio involved. Buying EUR/CHF after it has rallied a few hundreds pips, it is hard for the macro forces to keep pushing it higher in the current environment. On the other hand buying EUR/CHF when it collapsed on Feb 25, then that was a decent entry as you could of gotten in with a 50-100 pip stop loss and then if the market mean reverted back into the congestion area of 1.2250 – 1.2400, it would have been a decent reward risk. I did not have the foresight to do that. On the other hand buying EUR/CHF at 1.23 or 1.24, without proper catalyst, you need to use a wider stop, which means you need a bigger move to compensate, which means EUR/CHF needs to break the highs for it to be a decent reward risk ratio, and breaking the highs in the current environment is proving a bit difficult for the natural macro forces.
Overall, I am looking for volatility moves in the EUR, GBP, and JPY, but avoided any CHF pairs for now, unless I see a proper catalyst.
Although, again if I had to pick one, I would say long EUR/CHF. But then again, trading is not something that has to be forced upon someone. You are not forced to pick a trade every day or pick a direction for every financial instrument. You can sit carefully and watch and pick out your spots. And you certainly don’t have to keep the same positions on, in the same exact size every trading day. You can trim or add to them depending on your interpretation of the information flow and position sizing strategies.
That doesn’t mean you can’t engage in short term tactical trading trying to capture the intraday inefficiencies and moves and ODVE and MDMM. You certainly can! You just have to do it with an appropriate position size, taking into account the principle that the more leverage and more risk you take on in a trade, the faster it better start working out for you.