This Is A Compelling Trade

  • August 25, 2004
  • Dave Floyd


Short EUR/CHF
Is Compelling

Let’s start
today’s piece with a bit of a synopsis on current FX movements and end with an
analysis of a newly established trade.

First, the
dollar continued to move higher throughout the New York session as it became
apparent that comments from Fed Governors McTeer and Bernanke hold constant the
Fed’s vision that the economic recovery is in fact sustainable.  Model driven FX
accounts entering long-dollar positions are also seen driving the flow. 
However, with thin conditions and no real size players seeking risk exposure,
one does wonder if model driven flows can in fact sustain this rally.  With GDP
and Greenspan comments due later in the week, the trend may very likely change
again if the news is not what dollar bulls are seeking.


Interestingly enough, the strongest currencies in recent weeks were the ones hit
the hardest, NZD, AUD.  Despite solid evidence that rate differentials will
remain wide and the possibility that the recent rise in oil prices may be due
more to global demand than fear of supply shocks, the sell-off has been swift
and deep.  We feel that in the days to come this will represent a fantastic
buying opportunity baring no dramatic news on the terror or economic front.

To review,
both the NZD and AUD are our choice currencies at present.  Both are approaching
potentially key cycles on the charts, which may signify a reversal.  The
short-term stop losses mentioned in yesterday’s column were breached and lower
levels were achieved.  Now it is simply a matter of waiting patiently.


EUR/CHF

Macro
analysis suggests that this pair should trade lower simply based on expected
rate differentials and stronger economic data in Switzerland relative to
Europe.  While this argument holds up well on paper, the charts have not
confirmed this trade, until possibly today.

The
technical break of the bull trend line is one piece that indicates that 1.5300
might just be the next price target.  The chart below shows out notations as to
why we feel this trade is in play at present.
 






















 

While this
play is a bet on a weaker EUR relative to CHF, we cannot overlook that the USD/CHF


has shown remarkable
strength in recent sessions, rallying nearly 300 pips since Friday alone.  The
CHF as a play on geo-political developments is a bit shaky at best right now.  A
move back above 1.2860 (wave high and long-term trend line) may allow for a
significant move higher in USD/CHF.  This may have implications on EUR/CHF and
will need to be monitored.  If this were to occur it would signal loud and clear
that the market perceives less instability in the world that what is now
commonly accepted.


Today’s
Levels:

EUR/USD: 
1.2100, 1.2150, 1.2030, 1.2071

NZD/USD: 
.6540, .6483, .6423

EUR/CHF: 
1.5412, 1.5381, 1.5428

As always, feel free to send
me your comments and questions.


DaveÂ