Have you traded the USD/CHF in the past few months?
If so, you probably paid too much for your trade.
Since the Swiss National Bank set an explicit floor in the EUR/CHF at 1.2000 in on September 6, 2011, volatility in the pair has declined markedly. Price action has been even more subdued over the past 7 weeks - in fact, the EUR/CHF has consolidated in a miniscule 96 pip range over that time period. As the Average True Range indicator in the daily chart below shows, the typical range of each day’s trade has declined from an incredible 320 pips when the SNB intervened to only 25 pips today.
With the euro and Swiss franc essentially stationary against one another, the USD/CHF has been trading as the inverse of the EUR/USD. When the euro rises, the vast majority of the time, the Swiss franc also rises, and visa-versa. The 1hr chart below clearly shows the ridiculously high correlation between the EUR/USD and the CHF/USD (USD/CHF Inverted):
*Note that this correlation is not guaranteed to continue, and other factors beyond the SNB’s policies may cause this correlation to deteriorate in the future
The above chart is very significant because it means trading the USD/CHF is pointless as long as the correlation holds, given the greater liquidity and tighter spreads on the EUR/USD. To wit, according to internal GFT data, the spread, or cost of trading, the USD/CHF was 33% higher than that of the EUR/USD over the past four weeks.
Anyone who has traded the USD/CHF lately has, in essence, paid extra for a trade in the EUR/USD with an upside-down chart. If you have though, you're not the only one; I've also placed a few trades in the USD/CHF recently – see here and here for two examples from earlier in 2012. Looking at the recent correlation, these trade ideas would have been better focused in the EUR/USD.
As long as the SNB does not intervene and volatility in the EUR/CHF continues to languish, Swissie traders should focus their analysis and trades on the EUR/USD. Meanwhile, for traders interested in speculating on intervention by the SNB, the EUR/CHF is likely to have a much cleaner reaction. For more on this topic, along with a potential trade idea to take advantage, see “EUR/CHF: Keeping Faith in the SNB.”
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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