Correlated opportunities in the Swiss franc

Traders often seek repeated patterns or repetitive relationships that we can take advantage of for profit. These patterns exist across all markets and time frames, but some are more easily identified than others. One such exploitable pattern involves the Swiss franc and the U.S. dollar. This currency relationship typically repeats a certain move at least once a day during any given trading session.

The first step to understanding the relationship between the Swiss franc and the dollar is to examine the birth and evolution of the foreign currency. While it may seem unlikely that such ancient history has any impact on the intraday fluctuations in the 21st century, it does help us appreciate the connections between the Swiss and U.S. denominations.

Prior to 1798, Switzerland as a country was divided into cantons or provinces, each with its own currency. This is similar to the early history of America when the country operated under the Articles of Confederation and each state minted its own coin. Imagine how problematic that was for conducting interstate commerce.

In the Helvetic Republic, a late-18th century effort to bring Switzerland under united rule, a currency pegged to the French franc was created. France was the premier world power at that time. Initially, this common currency was equivalent to 6.75 grams of pure silver or 1.5 French francs. This effort only lasted a few years, however, before local currencies regained favor.

A generation later, in 1850, the Swiss Federal Constitution mandated that only the federal government would be allowed to mint money, replacing the local currencies. Initially, the Swiss franc was pegged to the French currency and then directly to silver before Switzerland joined the Bretton Woods system in 1945, pegging its value to the dollar.

Fundamental drivers

Today, the Swiss franc sees significant fluctuations vs. other currencies. Throughout 2011, it had massive appreciation  as the dollar slid. The stronger Swiss franc was not good for Switzerland’s export economy, and the Swiss National Bank began targeting a value of 1.20 Swiss francs vs. one euro. The Swiss central bank would sell foreign currencies to achieve that rate. This is a common practice of central banks to keep their country’s products cheaper, and more attractive, overseas. Indeed, this is a cornerstone of Japan’s current so-called “Abenomics” principles.

In any case, the Swiss franc currently sells at or below the threshold of 1.20 euros. Most likely the reason for the mass appreciation was the Greek bailouts that occurred during that time. Most Europeans were concerned that the euro would devalue, and the Swiss franc always has been the emblem of stability. Be warned, however, this is not to say that such a devaluation couldn’t happen again. It’s the type of major market-moving event that currency traders always should anticipate.

Today, each tick on a Swiss franc futures contract at the CME Group is worth $12.50. Unto itself, this is quite appealing, and better than other currencies such as the Canadian dollar or the Australian dollar. 

In addition, the Swiss franc depicts behavior that repeats across trading sessions. This can be observed and recognized after following the market on a day-to-day basis over an extended period. One such pattern is relatively simple — a basic surge in either direction — but alert traders can be prepared to take advantage of this surge when it happens. Here are the parameters of the move:

  • Once a day, typically in the morning, the Swiss franc will make a move that is generally worth 20-30 ticks.
  • The move often is seen following a major economic news announcement, in which case it may happen much later in the day. Case-in-point: On Sept. 18, the move didn’t occur until after the 2 p.m. statement of the Federal Open Market Committee.
  • If no major news announcement is planned, then generally the move will occur anytime after 10 a.m. (EST) once the markets have settled down post-opening and there is a better sense of direction.
  • This move corresponds to an opposite move in the U.S. Dollar Index.
  • This post-10 a.m. move does not exclude other moves throughout the day. It’s identified here as a repetitive pattern that we can anticipate and exploit. Examples of recent moves in the December futures contract for both the Swiss franc and the dollar index can be seen in “Up surge” (below) and “Order up” (next page).

Trading the move

The charts reflect the inverse relationship between the Swiss franc and the U.S. dollar. Clearly there is negative correlation here — a relationship that we would expect given the history of the Swiss franc and the fundamentals at work. The first step to taking advantage of this move is knowing it exists. Then you can prepare for it. Each day, watch the dollar at or around 10 a.m. and look for direction. Typically, prices start to settle down a half-hour after the 9:30 a.m. open of the day session. This move usually breaks soon after. 

Turn your attention to the greenback. When the dollar appears to be establishing a high or low near that time of day, look for opposite direction confirmation in the Swiss franc. For execution purposes, the Swiss franc offers the biggest bang for the buck with a 25% larger tick size. Among setup trades, this one is relatively safe and easy to spot, especially in the Swiss franc, which typically experiences extended moves when it does have a significant turn.

One method for getting into the market is to place a bracket order that will be executed in either direction at the time of the move. Consider a 10-tick stop and a 20-tick profit target. For most of these moves, you can expect a 20- to 30-tick advance in either direction. Be prepared to modify the profit target if necessary.

Don’t forget the stop loss, because anything can happen in a volatile currency market. A trailing stop is another layer of risk management. With a trailing stop, you enter with an initial stop loss then for each 10-tick move in your favor, the stop is advanced by 10 ticks. This way your paper profits are protected after a certain point. However, keep in mind that if you rely on the trailing stop to exit your trade that it, by definition, will get you out after a 10-tick retracement.

Market patterns don’t have to be powerful, and they don’t have to be substantial to make traders money. However, they do have to be reliable and identifiable. This simple movement in the Swiss franc and the dollar index can provide an ongoing profit opportunity for disciplined and attentive traders.

Nick Mastrandrea is the author of Market Tea Leaves. You can reach him at his web site www.markettealeaves.com.

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