Trade Idea - BUY EURCHF on SNB Interventions

No one who's listened to me over the last month or so will be surprised to hear that my first trade idea since being back online is to buy EURCHF. 

(Source: cTrader / FXPro)

Looking back at the last 20 years of history, we can see that EURCHF is approaching historically low levels. In my view, this strength for the CHF is unwarranted given the permanent dovishness of the SNB and its total dislike for currency strength. 

Given the SNB is already active in the market selling CHF (see chart below with increasing currency reserves in millions - if reserves are increasing, they must be selling CHF). So my view is that we see accelerated CHF sales by the SNB in the medium term. Many will remember (and be scarred by) that fateful assertion by the SNB that they would be prepared to sell unlimited quantities of CHF to maintain EURCHF at 1.20 back in 2011. 

(Source: Trading Economics) 

So what does this mean? It means we have a very asymmetric distribution of risks in terms of trading CHF in the near term. Much more currency strength is impossible for the CHF given the SNB's aversion to a stronger currency. 

At the same time, there is a possibility that we see further weakness - not just from currency sales but also from their extreme dovishness. Looking at the Euro Area inflation number today at 3%, it seems we could well see the beginning of taper talk in the Eurozone - so we have a more hawkish ECB and relatively dovish SNB. 

To look at some key levels, the chart below simply considers some recent highs and lows to mark up points of support and resistance (excel available on request). 

30/08/2021	20d	50d	100d	200d
High	1.08329	1.09687	1.10539	1.11192
Low	1.07118	1.07118	1.07118	1.07118

(Source: Bloomberg)

Trade Structure: 

In the short-term, I'd be looking to get long at current levels (1.080) and targeting initially the 1.09687. Here I would move SL to the entry and aim for the 100d high at 1.10539. Here I would take half profit, and then aim for the 1.11192 200d high to take the rest profit for a total return of 2.65%. 

For a SL, I am actually pretty convinced this trade should be played for a while since the SNB won't tolerate a significantly stronger Franc, but just to be sure, I'd put the SL just below the recent lows. 1.07. This would be a loss of c.1% for a decent risk reward ratio. 

In terms of horizon, I'd be happy to hold this trade for a few months. We have the next SNB meeting on 23 September, so this could be an interesting period to watch. 

I will provide an update of this trade idea in each report.