EUR/CHF at Record Low Presents Bullish Opportunity

A fresh record low for the EUR/CHF has drawn our attention as we often see a retracement following a test of such a critical level. The Franc has benefitted from the ongoing sovereign debt crisis as traders seek its safety with the Euro-Zone fragile. Typically when we see Swissie strength concerns over SNB intervention emerge as the country’s central bank desires a weak currency relative to its main trading partner to inspire demand for exports and guard against deflation. Policy makers left their benchmark rate on hold near zero as they look to limit the potential for further appreciation. Policy makers also warned of the potential for a significant slowdown in growth due to the impact from exchange rates. However, the monetary authority didn’t expressed concern over prices as they continue to see stability there, which could leave them on the sidelines. If current levels hold then an argument can be made that the pair is carving out a wide range between 1.2735-1.3850.

Levels to Watch:

-Range Top: 1.3850 (Range, Pivot)

-Range Bottom: 1.2735 (Range, Pivot)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 1.2875-above the 12/16 high
• Stop: Set the stop to 1.2775-100 pips in risk
• Target: The first target is 1.3119-20-Day SMA

Trading Tip – Considering the prevailing bearish momentum we will look for confirmation of a potential reversal which is why our entry is above today’s daily high. The pair is on the verge of putting a seventh straight down day which doesn’t necessarily signal a reversal, but makes the case for at least a small retracement. However, we never recommend trying to pick a bottom as prevailing fundamentals points to further downside risks. A spinning top candle is taking shape today which is a positive sign for our bullish set-up as it warns of a possible reversal. Despite upside potential to the range top we will remain cautious with this trade and out initial target is the 20-Day SMA at 1.3152 but failure there could lead to a sharp reversal, so we will have a trailing stop and could look to tighten it as we get deeper into the money. Also, any signs of intervention should be followed by profit taking to guard against a retracement.

Event Risk for European and Switzerland

European –German business confidence unexpectedly soared last month despite the ongoing issues in Ireland, with optimism expected to have held firm as solutions are being generated for the indebted country. The IFO institute gauge is forecasted to slip to 106.0 from 106.3 where another upside surprise could add to building confidence in the region. The release will be the only tier one gauge on the last day of the week and may provide a final opportunity to take advantage of volatility. Continue confidence could generate support for the single currency, but if the debt crisis is dimming the outlook for business leaders in the region’s largest economy, downside risks will increase.

Switzerland – The KOF Swiss economic institute will release their economic forecasts and if they fall in line with the downbeat comments from the SNB we could see the Franc loses some of its luster as a safe haven. A weak growth forecasts will raise the outlook for central bank intervention, which could be enough to stem current bullish momentum. The November trade balance could also add to the dimming outlook for the domestic economy it reveals a slowdown in export demand.