Potentially The Safest Forex Play In The Entire FX World

Wednesday UBS (UBS) reported that the Swiss National Bank, their central bank, may have spent as much as 35 billion francs ($32 billion) since March to stop their currency from appreciating.

SNB Governing Board Member Thomas Jordan, was quoted as saying that the SNB will continue to intervene and halt any gains by the Swiss currency. And so far, they’ve been highly successful. They’ve driven the franc down 2.9% vs. the euro since the start of their interventions!

You see, the SNB can sell “an unlimited” number of francs (their home currency) and buy other foreign currencies to hold their currency down. So what are they buying as they sell off these francs?

According to the SNB’s web site, they’ve confirmed that they’ve increased their curerncy holdings 46% from 55.8 billion francs to 81.7 billion francs. This is no small sum. These guys are serious!

Here’s where the SNB’s focus is at…and where yours should be too!

So here’s what they’ve disclosed that they’ve bought.  U.S. dollar holdings rose from $13.2 billion to $19.9 billion (an increase of $6.7 billion. They reported that their euro holdings have increased from 20.3 billion euros to 32 billion euros (an increase of 11.7 billion euros). British pound holdings increased from 2.93 billion pounds to 2.97 billion pounds (40 million pounds…a far cry from the billions of the others).

You can see where the central bank’s main focus has been. It’s been in selling francs and buying euros far more than anything else. Why? Because that’s where the bulk of their exports go to. The “high franc” was killing their export business which is crucial to their economy. Far more exports go to the rest of Europe than it does to the U.S. or even U.K. So the EUR/CHF becomes the primary concern on their “radar”.

If you’ve followed my articles for a while now, you know I’ve been harping lately on this pair. Why? It’s not every day that you get an edge in your favor like this. The SNB hasn’t done a “solo intervention” like this since 1992. So you can see that this doesn’t happen every day. Therefore, you’d better seize these opportunities when they arise, because they won’t last forever.

To my knowledge, I was the first one to start pushing EUR/CHF purchases. However, I’ve noted some other analysts along the way that have “hopped on board” with me. Lately, the Bloomberg Economists have agreed with this opinion. Also, Jessica Hoversen, an analyst from MF Global recently hopped on board too as she stated that, “The SNB has won its  battles, and they’ve given no indication that they are ready to end this policy”. She went on to say that she, “advises buying euros and selling francs when the EUR/CHF pair approaches its 200 day (simple) moving average.”

In my opinion, they’ll continue to sell francs and buy euros for quite some time. Why? Because their central bank doesn’t anticipate their economy’s return to growth until sometime in 2010 after shrinking between 2.5% and 3% this year.

3 Reasons Why I Believe this to be the “Safest Play in the Entire FX World”!

Therefore, I call this “potentially the safest FX play in the entire forex world” because you have a few dynamics working in your favor now that didn’t exist before.

1.      The SNB is spending billions  to sell francs and buy euros. Therefore, as you join that, you have huge “fire power” behind you as the deep pockets of their central bank backs up your trade.

2.      The technical downtrend has now been broken by just about any metric you’d want to use. The EUR/CHF pair trades above its 200 SMA. It trades above its 50 SMA (shown below). It’s broken its red downtrend line on the chart below. So “any way you slice it”, the trend is now upward, not downward. Why is that important? It’s always important to trade with the trend and not against it, in order to have an “edge”. Also, many big hedge funds and money managers use “trend following” systems. As these manual and automaetd systems detect a new trend, you get another fresh wave of huge buying as this happens.

3.       With our broker, you can earn some interest on each mini lot each day, as you await even more appreciation in the EUR/CHF pair.

You can readily see from the chart above that the pair has continued to put in “higher lows” ever since last October (even before the interventions started). However, the SNB has continued to “put a floor in” this pair at higher levels periodically as they go into the market and sell francs, sooner & sooner all the time!

Ever since June, the trend has been upward and makes the trade far more appealing, because you’re not having to fight a downtrend now, and neither is the Swiss central bank (finally).

We can zoom in a bit on the 4 hour chart below and  see that ever since the massive, heart stopping, intervention started, they’ve kept the upward momentum going overall as shown by the green arrow below.

So if your analysis agrees with mine, then “hop on board this train” before its totally “left the station”.

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Comment by Kiwi

2009-07-30 19:12:05

Sean,
The flat channel in EURGBP seems inconsistent with intervention primarily in EURCHF. I have repeatedly seen CHF move down against all currencies, only to read the next day that “EURCHF intervention” caused this. The live action told a different story. Regardless, the major risk is that inflated equity markets may tumble.

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Comment by Sean Hyman

2009-07-30 19:30:06

The intervention in EUR/CHF has been clear from the SNB’s website and the charts above. This would have nothing to do with the trend on EUR/GBP though. However, EUR/GBP is now in a downtrend as the GBP is now stronger than the EUR.

A 50 period SMA on a daily chart of EUR/GBP will point out it’s downtrend.

The SNB has been buying up several currencies as they sell off the CHF but they’ve had double the euro purchases as dollar purchases because the EUR/CHF exchange rate is the one that is the most detrimental to their economy and export business.

Hope this helps.

Thanks for commenting and reading my articles.

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Comment by Anthony Sanzone

2009-07-31 10:00:52

Hi Sean: I agree with your thesis regarding the mid to long term EUR/CHF view but I tend to disagree with the SNB putting in a higher floor for possible future interventions. The trend may be higher but market risk aversion may provide too much volatility at the present levels for the average long term trader.

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Comment by Sean Hyman

2009-07-31 15:30:39

This pair is less volatile than most pairs in FX and the short, medium or long term investor can use this info to get a bias and profit from.

Risk aversion is diminishing more all the time as more and more central bankers, fundamental data and now presidents of nations are talking about the “worst being over” and “coming out of a recession”, etc.

That’s why stocks have climbed back above their 50 and 200 day moving averages, the VIX has dropped “big time”, etc.

Thanks for being a reader and commenting on the post. I greatly appreciate that.

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