As Russian forces consolidate their gains we are seeing a risk off scenario play out in the Forex markets, while the equity markets make up their mind about geopolitics and US growth fears and the tapering process. CHF which has been pegged to the Euro at 1.20 since late 2012 and was widely predicted to go to 1.25 not so long ago is trading in the low 1.21′s and could well fall further.
This means that sometime very soon the SNB could be forced into putting their money where their mouth is…..again! I say again because they have done so before and successfully defended the 1.20 peg. It must be quite disheartening from their perspective to see that rather than pushing up to 1.25 as the Eurozone slowly sorts out it’s institutional and monetary short-comings, here we are staring 1.20 in the face again. What is it with these foreigners 😉
Nevertheless it does present something of a decent trade set up. Either the 1.20 peg will hold, or it will fail.
Scenario A. It holds in which case a long entry under 1.21 for lets say a 100 pip stop loss could easily justify a 2:1 risk/reward multiple and a take profit target above 1.23. EURCHF was in the 1.23′s as recently as January.
Scenario B. It fails. This could be orderly or ugly. Orderly means it could well be in a wider “risk off†situation with equity markets dropping dramatically. Indeed if they had not dropped by then they may well see a failure of the 1.20 peg as a sell signal. Or it could be ugly. While an orderly move through 1.20 would see very little slippage, what happens if we close on a Friday night at 1.2005 and open again on Sunday night at 1.16! The mother of all slippage would be devastating to many traders and so guaranteed stops are probably a very good idea here in spite of the extra cost. From experience overnight charges in EURCHF are not cheap so choose your entry level carefully.
Gary – fxlight.co
