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.
The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.