Sometimes you can be smarter than the market – most times you cannot. When someone, or some institution insists on trading in one direction, you are usually smart to hop aboard or just get out of the way.
These are two time-tested lessons I chose to ignore in playing the Swiss franc in anticipation of currency intervention by the Swiss National Bank (SNB):
- The trend on the Swiss franc remains one of strength, not weakness, especially versus the euro (EUR/CHF).
- The trading action in EUR/CHF of infrequent but steep and persistent downward spikes suggests that someone or some institution(s) is eagerly and enthusiastically accumulating Swiss francs no matter how much the SNB prints.
Indeed buyers of francs were further energized today as Swiss National Bank directorate member Jean-Pierre Danthine all but admitted that the SNB will soon end its program of currency intervention (from the WSJ):
“‘Households and firms should prepare themselves for a return, sometime in the future, to a world of higher interest rates, with exchange rates being guided by market forces,’ Danthine said, according to the text of speech he made at a conference…’It is not a question of how, only of when,’ Danthine said, referring to the planned normalization of monetary policy.”
The biggest irony is that using existing evidence I concluded that the SNB is indeed winding down its efforts to devalue its currency versus the euro. Yet, instead, I was more attracted by the episodic possibilities of one or two last intervention attempts than the clear and present trend of franc strength! Moreover, the stabilization of the euro (versus the U.S. dollar) is playing out over a wide band. At the time of my last post, I did not consider whether the euro was at the top of this band. Fresh uncertainties about the path to resolving Greece’s debt crisis sent the euro tumbling today and leaving the top of the band firmly intact.
So now the Swiss franc sits at 17-month lows versus the euro, occupying the same levels last seen during the depths of the financial crisis. EUR/CHF now seems well oversold (see chart below), but, as they say, oversold can easily become even more oversold in the midst of a strong and stubborn downtrend.
Source: Dailyfx.com charts
I am now just looking to salvage the long position in EUR/CHF (fortunately, my trades in and out of longs on USD/CHF have been fine given the dollar’s recent burst of strength). Perhaps the SNB has one last headfake in store for the market…then again, maybe not…
Be careful out there!
Full disclosure: long EUR/CHF, long USD/CHF