USDCHF Hedge To Protect Dollar Bulls Through Event Risk
The Swiss Franc has historically served as a standby safe haven asset in times of financial and political uncertainty. It is understandable then that as the subprime fiasco and the credit crunch gripped the markets, the USDCHF pairing collapsed downward. Attractive Swiss fundamentals favored the trade as the mountain nation seemed insulated from US turmoil by its relatively modest trade links with the beleaguered superpower. However, it became clear into the first quarter of this year that not all was as rosy as it seemed.
Contagion from the US malaise began to spread, and Euro Zone data soured. With nearly 60% of Swiss imports headed for EU markets, the Swiss National Bank cut short its campaign of raising interest rates and began to brace for slowing growth. The USDCHF came off its lows just above 0.9640, with price action largely range-bound since.
USDCHF spent April between the 23.6% and 38.2% Fibonacci retracements of the 02/13-03/17 decline at 0.9987 and 1.0202, respectively. The recent breakdown in the EURUSD trend following that pair's test at an all-time high of 1.60 catapulted the dollar higher and took USDCHF to rest against the 50% Fibonacci retracement level at 1.0375. While this is indicative of a substantial trend change in the making, caution is warranted. This week is virtually packed with US data, and substantial risk exists that the pair will retrace to the 38.2% Fib level prior renewed bullish vigor in the dollar.
Hedging Strategy
Currency Pair: USDCHF
Long Term Bias: Bullish
Long Term Position: Holding Long (from 04/24 range breakout)
Short Term Bias: Bearish
Short Term Position: Short below 1.0375, Target 1.0202, Stop-Loss at 1.0458
Traders looking to protect their existing long USDCHF position or enter long at a favorable price may consider a hedge short USDCHF below 1.0375 with a target at 1.0202. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should USDCHF break out to the upside prior to the limit being hit. We will set the stop-loss near 1.0458.
When should I use the hedging feature?
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods - sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
DailyFX
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