The Euro/Swiss Franc exchange rate trades dangerously close to the Swiss National Bank’s stated floor at the SFr 1.2000 mark, and forex trading speculators have taken notice.
Our proprietary FXCM Speculative Sentiment Index data shows that the number of traders long the Euro/Swiss Franc outnumber those short by a massive 41 to 1. In other words—nearly 98% of traders in our sample are currently long the Euro against the Swiss Franc. This falls just short of the record set in February when the EURCHF fell to $1.2030, but the day’s not over and we could conceivably hit fresh peaks in our SSI.
Euro/Swiss Franc Chart Shows Retail Positioning Near Record Long
Data Source: FXCM Execution Desk DataChart Source: TradeStation
What happens next? Are forex speculators justified in positioning for Euro/Swiss Franc bounce?
The obvious question is whether such incredibly one-sided sentiment points to a Euro/Swiss Franc exchange rate bounce. When we saw similar extremes on the last decline towards SFr 1.2030, the EURCHF inched higher without any obvious prodding from the Swiss National Bank. Yet as we trade closer to the critical SFr 1.2000 mark, the threat of a showdown looms large and promises a great deal of volatility.
The Swiss National Bank remains committed to its EURCHF floor and as such stands ready to intervene at any moment. Such consistency in message and mission suggests that traders are justified in taking positions. Yet it seems unlikely that the SNB would essentially give speculators risk-free profits and we urge caution against taking aggressive positions against the lows.
Nothing is Guaranteed, Risk of EURCHF Declines Remains Real Despite SNB Floor
Financial markets are not known for their kindness, and even the threat of Swiss National Bank intervention does not guarantee that the Euro/Swiss Franc rewards speculators and remains above SFr 1.20. The fact that traders are so heavily net-long EURCHF suggests that any intervention could be quite expensive.
As the central bank would buy the EURCHF, speculators would aggressively sell long positions and book profits. Such a move could potentially offset the intervention and indeed make it quite expensive for the SNB to maintain their floor. That’s exactly what we have seen in previous failed SNB interventions, and you can be sure that central bankers are acutely aware of said risks.
Could we potentially see the EURCHF dip below SFr 1.20? Absolutely. The Swiss National Bank could stick to its word and defend the floor, but that doesn’t rule out an intraday spike below to take a lot of speculators out of their positions. A “run on stops” and momentary dip below 1.20 seems entirely plausible when one considers that the SNB does not want to have speculators sell into major interventions.
Trade setups for EURCHF
As traders we always want to know how we can take advantage of various opportunities, and we would be remiss to ignore the potential for a EURCHF surge. Yet we can’t ignore the risk of a decline, and such analysis suggests that the real opportunity could be to place buy entry orders below SFr 1.20 on the chance that the SNB makes a run on stop loss levels before intervening.
Is this guaranteed to work? Absolutely not. Yet we play probabilities, and in our opinion the SNB is unlikely to abandon its floor altogether. Time will tell whether this strategy proves successful.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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