It seems European countries are intent on achieving fiscal responsibility when pigs learn to fly. It would appear that day may be closer than many think. This week’s EU meeting minutes sent financial services stocks plummeting as the meeting was initially viewed as just another opportunity for an economic censure of its weaker members without presenting a long-term viable solution.  Despite the markets’ initial reactions, once analysts had a moment to truly digest what was said and how the future of the Euro-Zone may play out, the euro began its first substantial rally in some time.  France and Germany appear unable or unwilling to provide further capital to prop up the Euro-Zones fledgling economies. While this isn’t exactly new news, what was substantial is their commitment not to abandon the euro which left a bit of a logical gap. How do you continue to grow the euro and its auspices while pretending its weaker members aren’t really about to drag the whole union into bankruptcy? The answer is surprisingly simple. If they can’t hack it, you let the PIIGS fly!  This sent the euro soaring as traders began to salivate at the notion of a leaner and more stable euro anchored by its wealthier and fiscally responsible members.

Across the Atlantic the U.S. had a relatively tepid week comparatively as it continues to reclaim some of the ground it lost amidst its own fiscal crises. As apathy begins to set in over the prospect of a US default and the global economy shows signs of a slowdown, treasuries rallied this week helping restore faith in the Greenback and its role as the world’s reserve currency.  While the rally in USD helped bears breathe a little easier, not all was rosy as a flurry of sour economic data created more questions than it answered. Unemployment Claims jumped over 1% well past most analysts’ estimates. Existing Home Sales not only disappointed analysts expectations but actually declined from the month prior. Abysmal numbers out of the Philly Fed Manufacturing Index rounded out the week’s disappointments and added to speculation that we are indeed headed towards a second slowdown in less than 5 years.

Gold continued its epic surge as it reached a new record high of $1877 an ounce before settling around $1851.  Further buoying gold’s advance, an announcement by Venezuela which posses the world’s 15^th largest gold reserve to recall $11B in reserves from financial institutions around the globe. The move was made alongside further commitments from Venezuela’s political echelon to increase domestic gold production and nationalize its gold mining industry. While scientists have yet to discover a way to make money grow on trees, apparently some have settled for the prospect of plucking it from the ground. Perhaps it’s time for Goldman Sachs to invest some serious resources in alchemy and its practitioners?

Equity markets were down today in Europe and Asia as concern about the euro zone debt crisis continue to weigh heavily on our collective trading minds.  Things were no better stateside.  The US equity markets opened this morning with some pent up bearish energy, dropping almost 4% by 10am.  Slowly, and throughout the course of the rest of the day, prices continued to slide, with the S&P closing down 4.46%, the Dow down 3.68% and NASDAQ down a whopping 5.22%.  Ouch.

As many seasoned currency traders will often do when equities are tanking, let’s turn our attention to some of the safe haven currencies we depend on in times like these.  After the sharp correction that took the EUR/CHF from its low of 1.0102 to 1.1552 in four short days, buying pressure has re-strengthened the swissy for 2 straight days as nerves prevail.  The Swiss National Bank (SNB) is doing all it can to keep the price of its currency lower, but despite their best efforts, a representative pair, the EUR/CHF dropped all the way to 1.1239 today as shaky markets forced investors to the safety of the Swiss franc.  The SNB has even started to hint at negative interest rates.  That means charging for the privilege of having a bank account in their nation, a situation we haven’t seen since the 1970s.

As the precipitous drop during the US trading session flattened out, and a full- fledged sell off of US stocks seemed less likely today, the swissy gave back some of its gains to close around 1.1376.  Why so much talk of the CHF?

It is a perfect case study of the need to have a currency component in your portfolio if you ever hope to be able to describe it as balanced.  Case in point – an investor with a portfolio of US blue chips would likely have seen a 3% to 5% loss today.  That same investor, hopping into a long position in the swissy (short the EUR/CHF would be one way), using only 1% – 2% of their available margin (that means 1:1 or 2:1 leverage, NOT 100:1 or 200:1) – would have seen a 2% – 4% return on the opposite but corresponding spike in the value of the Swiss monetary unit.  Instead of closing the books today a big loser, investors with a balanced portfolio, (only stocks and currencies for the simplicity of this example) would have had anything from a 1 or 2% loss, to a 1 or 2% gain.  Much less volatile, and much better.

Of course, safe haven currencies are not a perfect hedge for equities, or anything else for that matter, and on another day the “balanced” portfolio could have just led to larger losses across the board.  As we all know there is no such thing as a sure bet, but as modern portfolio theory espouses, more balance and less volatility is often the way to go.

The 5 min chart of EUR/CHF shows some of the action of the pair today, first down almost 300 pips, then back up over 100, to close the day for a net loss of about 150 pips.  These quick moves highlight the need for good timing in this market, and that is where technical analysis comes into play.  To learn more about using technical analysis to time your entries and exits, visit our free education section, specifically Chapter 3 – http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-3-technical-tools/

On the chart below is RSI – Relative Strength Index – which measures the difference in magnitude between an instrument’s recent gains and losses, and by comparing the value of the RSI  to price action, can help identify potential reversal points.