On September 6th 2011, the Swiss National Bank decided to enough is enough and that the franc cannot continue being a safe haven trade in the financial markets. The central bank decided to change EUR/CHF from a free floating currency to one that has a peg set at the 1.20 level.
Since exchange rate floor has been set, the pair has traded in a narrow range and low volatility between 1.20 and 1.2648. With adequate monetary conditions and Switzerland appearing to have avoided deflation, EUR/CHF may eventually attempt another rally towards the upper boundaries of its range. A break above the 1.2650 area will only occur once we see the major risk scenarios in Europe firmly anchored.
Price action is currently respecting the 1.22 level while the pair is deeply entrenched within its tight 50-pip range (1.2200-1.2250) over the last trading week. The current oversold conditions do support a move higher and may ultimately look for a run towards the 1.2310 area which is where the 3 key Simple Moving Averages appear to be hovering around. Even on a breakdown below the 1.2200 level, investors appear to have abandoned their bearish bets that the peg will break and buyers should see limited downside on such a move.
The trade: Buy EUR/CHF at 1.2210 with a stop loss at 1.2160 and a take profit at 1.2410. The Risk/Reward Ratio is 1:4
Edward J. Moya
WorldWideMarkets Online Trading