By: Christopher Lewis
While the entire world frets about the European debt crisis, it makes sense that most traders are focusing solely on the EUR/USD currency pair. The headlines come out and push this pair up and down in violent movements that can make for sudden profits. Of course, these sudden movements can wipe those profits out in a blink of an eye as well as cause sudden losses. The average trader looks to these times as a great trading opportunity, citing how the volatility creates more chances to profit.
While the volatility does increase the odds of a profit, over time those odds will shrink as sooner or later one of these random headlines will work against you. This kind of focus is a major problem for the amateur trader as they are focusing on the potential profit, not the possibility of losses. With the speed at which the professionals get their information, you will find that much of the time the move is over by the time you get the headline. The market will move 50 pips in a blink of the eye, while you are waiting for the news. In this environment, the retail trader is at a major disadvantage to say the least.
So What Can a Forex Trader Do Now?
However, there are pairs that are behaving in a much calmer manner. While the world has been focusing on the Euro, the USD/CHF pair has been very reasonable and is showing a nice trend. By looking at the pair since the Swiss National Bank announced a “floor” in the EUR/CHF pair of 1.20, you can see this pair initially shot straight up as all XXX/CHF pairs did. It then had a nice calm and healthy pullback, followed by another move upward. This has all been orderly in the process, and makes total sense if you consider the scenario surrounding this pair.
For one thing, the Franc really can’t be bought at this point. Yes, it is true that in theory the Franc can strengthen, but only so much. It has limited upside potential as a currency at the moment. Some traders will point to the Bank of Japan and its failure to keep the value of the Yen down, but they don’t understand that the market for the Franc is much, much smaller than the Yen. The SNB has a real shot at taking control, and quite frankly has. This rules out the Franc as a purchase, which also eliminates it as a safe haven currency at this point. However, the US dollar still has that status, and with the Bank of Japan intervening in the Yen pairs, it is simply too risky to buy the Yen at the moment. This by default leaves the USD as the sole “safe haven”.
So as the Swiss are weakening their currency, and the world frets – is it that surprising that the USD/CHF rises? This is the trade nobody is paying attention to, but perhaps you should.